Archive for July, 2014

Circular 230 is a document containing the statute and regulations detailing a tax professional’s duties and obligations while practicing before the IRS; authorizing specific sanctions for violations of the duties and obligations; and, describing the procedures that apply to administrative proceedings for discipline. Circular 230 is the common name given to the body of regulations promulgated from the enabling statute found at Title 31, United States Code § 330. This statute and the body of regulations are the source of OPR’s authority. Title 31 seeks to insure tax professionals possess the requisite character, reputation, qualifications and competency to provide valuable service to clients in presenting their cases to the IRS. In short, Circular 230 consists of the “rules of engagement” for tax practice. The underlying issue in all Circular 230 cases is the tax professional’s “fitness to practice” before the IRS.

Barrie McKenna, Globe & Mail 30 July 2014, p. B3 http://bit.ly/1tus1jA “A leading accounting firm is taking the unusual step of urging Canadians to double-check their citizenship status, warning there may still be thousands of accidental Americans in Canada oblivious to their U.S. tax obligations.” Only three comments so far. I made a comment, calling […]

I began my career as a prosecutor handling a wide range of crimes, but I have spent nearly a decade focusing on cyber issues – including as the National Coordinator of the Justice Department’s Computer Hacking and Intellectual Property, or “CHIP,” program. …

But we also emphasized that terrorists are not the only ones seeking to harm us online—there are other dangerous actors out there, including nation-states. We pointed to the growing use of botnets as a way to attack networks, infect computers, and inject spyware.

I could scarcely have guessed back in 2007 that by today the NCFTA would have aided in successful prosecutions of more than 300 cyber criminalsworldwide. … “John Dillinger couldn’t do a thousand robberies in the same day in all 50 states in his pajamas halfway around the world. That’s the challenge we now face with the Internet.” …

[5 Chinese military indicted for cyber-stealing American nuclear power and other industrial secrets]

Earlier this summer, we announced unprecedented charges against five members of the Chinese military for computer hacking, economic espionage, and other offenses directed at six American victims in the U.S. nuclear power, metals and solar products industries.

What these charges allege is stealing from America’s heartland, literally and figuratively.

The charges allege that cyber thieves grabbed the hard work of companies right here in Pennsylvania. And they allege that the thieves targeted key American economic sectors, like metals and energy.

This is the true face of cyber economic espionage and of those it targets. This type of theft hurts American competitiveness by stealing what we work so hard for.

These charges against uniformed members of the Chinese military were the first of their kind. Some said they could not be brought. But this indictment alleges, with particularity, specific actions on specific days by specific actors to use their computers to steal valuable information from across our economy.

It alleges that while the men and women of our businesses spent their work-days innovating, creating, and developing strategies to compete in the global marketplace, these members of Unit 61398 spent their work days in Shanghai stealing the fruits of our labor.

It alleges that they stole information particularly beneficial to Chinese companies, and took communications that would provide competitors with key insight into the strategy and vulnerabilities of the victims.

We should not and will not stand idly by, tacitly giving permission to anyone to steal from us. We will hold accountable those who steal—no matter who they are, where they are, or whether they steal in person or through the Internet.

Because cyber crime affects us all, including those here in Pennsylvania who have suffered at the hands of cyber thieves.

While cases like the one brought here in Pittsburgh are extremely challenging, we proved that they are possible. The criminal justice system is a critical component of our nation’s cyber security strategy.

At the Justice Department, we follow the facts and evidence where they lead. Sometimes, the facts and evidence lead us to a lone hacker in the United States, or a sophisticated organized crime syndicate in Russia. And sometimes, they lead us to a uniformed member of the Chinese military.

Other times, as we recently saw, they may lead us to a foreign businessman alleged to have conspired to hack in and steal information from Boeing and other defense contractors.

Information that included more than six hundred thousand data files of sensitive information related to U.S. military aircraft and other defense matters.

And yet other times, they may lead to other types of criminals, like those investigated and prosecuted by DOJ’s Criminal Division for spyware, botnets, and similar conduct. …

Terrorists are also using cyberspace to further their goals. They are using it to communicate and plan. They are using it for propaganda and recruitment. And they are intent on getting to the point where they can conduct cyber attacks themselves.

That last category is a relatively new one. But we know that terrorists are looking to launch cyber attacks. They have that intent now.

Over the past few years, we have seen al-Qaeda issue calls for cyberattacks against networks such as the electric grid, comparing vulnerabilities in the United States’ critical cyber networks to the vulnerabilities in the country’s aviation system before 9/11.

If successful, terrorists could use cyber attacks to bring about economic or physical damage, or even, in extreme cases, serious injury or death. …

[OtherEconomic Espionage]
As just one example, in March, we successfully obtained a significant conviction against Walter Liew for economic espionage.

What Liew stole was something Americans see and use daily. Something that does not have a national security implication. Something that simply brings a profit.

Liew stole the formula for the color white from Dupont and passed it to a large Chinese state-owned company. Just this month, he was brought to justice — sentenced to 180 months’ incarceration and ordered to pay restitution of about half a million dollars. …

[National Security Cyber Specialists’ Network]
Most significantly, in 2012, we created and trained the National Security Cyber Specialists’ Network to focus on combating cyber threats to the national security.

This Network—known as NSCS—includes prosecutors from every U.S. Attorney’s Office around the country, along with experts from the Department’s Computer Crime and Intellectual Property Section (or “CCIPS”) and attorneys from across all parts of NSD. …

That’s how we were able to indict five members of the Third Department of the People’s Liberation Army. And now these men stand accused of cyber intrusions targeting a range of U.S. industries.

[GameOver Zeus botnet]
A great example is yet another Pittsburgh story. Back in June, our colleagues in the Criminal Division, the Western District of Pennsylvania, and the Bureau undertook an operation that disrupted the GameOver Zeus botnet.

This criminal threat was significant – losses attributable to the botnet were estimated to be more than $100 million. But disruption involved more than just criminal charges – it also involved civil court orders, significant information sharing, and seizures of servers in many foreign countries….

[InfraGard]

Through the FBI’s InfraGard, the FBI works closely with companies that have been the victims of hackers.

That program, which has grown to more than 25,000 active members, continues to bring together individuals in law enforcement, government, the private sector, and academia to talk about how to protect our critical infrastructure.

Like this:

Why would a taxpayer want to include the IRS in his or her wedding plans? Well, “its the law”.

No, the taxpayer does not need to send a wedding invitation to the closest IRS office. But a 2014 marriage results in changes to the new married “couple’s” 2014 tax filing and possibly amount owed in tax for 2014. Whether the couple will owe more in tax each year, including the year of marriage, over that of the combined amount of each individual’s tax due, depends on several factors, such as whether both spouses have income and how much that income is. In general, a married couple, when both spouses are employed, pay more income tax than if they remained single and filed individual tax returns. Also, the married couple may owe, and may owe more, of the additional 3.8% Net Investment Income Tax.

The IRS’ Summer Tax Tip 2014-2 reminds taxpayers that marriage has certain tax consequences from at least a filing persepctive. These include:

Change in filing status. If a couple is married before, or even on Dec. 31, 2014 at 11:59pm, then for the whole year of 2014 for tax purposes the IRS considers the couple married. Thus, neither spouse may file an individual’s tax return any longer. Instead, the married couple must choose to file your federal income tax return either jointly or separately (as a married couple) for 2014.

Same-sex married couples:If the couple is legally married in a state or country that recognizes same-sex marriage, then the couple must file as married for the federal tax return. This is true even if you and your spouse later live in a state or country that does not recognize same-sex marriage.

Name change. The names and Social Security numbers listed on a tax return must match the Social Security Administration records. If a spouse changes the family name, then that name change must be reported to SSA.

Change tax withholding. A change in marital status requires that a new Form W-4 for each spouse’s employer (Employee’s Withholding Allowance Certificate). If it normal that when both spouse have income, the combined incomes moves each into a higher tax bracket for withholding at work. Use the IRS Withholding Calculator tool to assist completing a new Form W-4.

Obama Care Premium Tax Credit changes in circumstances. If a taxpayer took advantage of receiving the advance payment of the premium tax credit in 2014, then it is required to report changes in circumstances, such as changes in income, marriage, or family size, to the Health Insurance Marketplace. Moreover, if one spouse will move out of the area covered of a current Marketplace plan, then that spouse must notify the Marketplace.

Address change for IRS letters. A taxpayer has the responsibility to inform that IRS of an address changes. To do that, file Form 8822, Change of Address, with the IRS. Also, separately, the taxpayer should ask the U.S. Postal Service online at USPS.com to forward any mail sent to the former address.

Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This book provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.

Anyone interested can try Tax Facts on Individuals & Small Business, risk-free for 30 days, with a 100% guarantee of complete satisfaction. For more information, please go to www.nationalunderwriter.com/TaxFactsIndividuals or call 1-800-543-0874.

The U.S. Tax Code: Love It, Leave It or Reform It!

Watch the recorded hearing’s webcast (link via Logo above)

Wyden Statement on Corporate Inversions and the Need for Comprehensive Tax Reform (excerpt):

The U.S. tax code is infected with the chronic diseases of loopholes and inefficiency. These infections are hobbling America’s drive to create more good-wage, red, white and blue jobs here at home. They are a significant drag on the economy and are harming U.S. competitiveness. The latest outbreak of this contagion is the growing wave of corporate inversions, where American companies move their headquarters out of the U.S. in pursuit of lower tax rates.

The inversion virus now seems to be multiplying every few days. Medtronic, Mylan, Mallinckrodt and many more deals have either occurred recently or are currently in the works. Medtronic’s proposed $42 billion merger with Covidien was record-breaking when it was announced in June. But the ink in the record books had barely dried when AbbVie announced its intention on Friday to acquire Shire for almost $55 billion. According to the July 15th edition of Marketplace, “What’s going on now is a feeding frenzy … Every investment banker now has a slide deck that they’re taking to any possible company and saying, ‘you have to do a corporate inversion now, because if you don’t, your competitors will.’”

Over the past few months, we’ve seen a handful of legislative proposals to address the issue of inversions. Most of them are punitive and retroactive. Rather than incentivizing American companies to remain in the U.S., these bills would build walls around U.S. corporations in order to keep them from inverting. …

Hatch Statement at Finance Committee Hearing on International Taxation (excerpt):

For example, in 2013, the OECD launched its Base Erosion & Profit Shifting, or BEPS, project. While we appreciate the OECD’s efforts in bringing tax authorities together to discuss and work through issues, many of us have expressed concern that the BEPS project could be used by other countries as a way to increase taxes on American taxpayers. ….

This approach, in my view, completely misses the mark.

While it may put a stop to traditional inversions it could actually lead to more reverse acquisition inversions as our U.S. multinationals would, under this approach, become more attractive acquisition targets for foreign corporations.

Whether it is traditional corporate acquisition inversion or a reverse acquisition inversion, the result is the same: continued stripping of the U.S. tax base. …

Over 600 pages of in-depth analysis of the practical compliance aspects of financial service business providing for exchange of information of information about foreign residents with their national competent authority or with the IRS (FATCA).

Like this:

While finding the most suitable products to meet a client’s retirement income goals is fundamental to developing an appropriate retirement planning strategy, discovering the most desirable mixture of product features can prove equally critical.

In this vein, advisors should take note that indexed annuity sales have gained steam in recent months. New studies suggest that while the base product itself may be attractive to many, in the vast majority of cases it is the optional features that are actually propelling sales.

Understanding how the guarantee features that can accompany indexed annuities have made these products competitive against more traditional bank-sponsored products has, therefore, become crucial to determining how these options can help an indexed annuity rise to the occasion.

Read the intelligence about guaranteed lifetime withdrawal benefits (GLWBs) and annuities of Professor William Byrnes and Robert Bloink at ThinkAdvisor

“Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience. The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community,” added Rick Kravitz.

Two global banks, Deutsche Bank and Barclays Bank, and more than a dozen hedge funds, such as RenTec, misused a complex financial structure to claim billions of dollars in unjustified tax savings and to avoid leverage limits that protect the financial system from risky debt, a Senate Subcommittee investigation has concluded. The improper use of this structured financial product, known as basket options, is the subject of a 93-page report and 5 hours of testimony.

Jing Wang, 51, the former Executive Vice President and President of Global Business Operations for Qualcomm Inc., today pleaded guilty to insider trading in shares of Qualcomm and Atheros Communications Inc. Wang also pleaded guilty to laundering the proceeds of his insider trading using an offshore shell company.

Two global banks and more than a dozen hedge funds misused a complex financial structure to claim billions of dollars in unjustified tax savings and to avoid leverage limits that protect the financial system from risky debt, a Senate Subcommittee investigation has found.

An esteemed FATCA expert Haydon Perryman, who is director of FATCA compliance solutions of Strevus, designed the FATCA programs for two Global Banks, and managed the FATCA programs for over three years for Barclays, Lloyds Banking Group and RBS.

The IRS released the new instructions to supplement the instructions for the W–8BEN, W–8BEN–E, W–8ECI, W–8EXP, and W–8IMY, and provide, for each form, notes to assist withholding agents and FFIs in validating the forms for chapter 3 and 4 purposes in addition to outlining the due diligence requirements applicable to withholding agents for establishing a beneficial owner’s foreign status and claim for reduced withholding under an income tax treaty.

In order to document an account holder or other payee, a withholding agent or an FFI may need to obtain a withholding certificate (i.e., Form W-8 series) to establish the chapter 4 status of a payee or an account holder or the payee’s chapter 3 status, or to validate a payee’s or an account holder’s claim of foreign status when there are U.S. indicia associated with the payee or the account.

Who is a withholding agent?

Any person, U.S. or foreign, in whatever capacity acting, that has control, receipt, custody, disposal, or payment of an amount subject to withholding for chapter 3 purposes or a withholdable payment for chapter 4 purposes is a withholding agent. The withholding agent may be an individual, corporation, partnership, trust, association, or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies.

What if more than one person qualifies as a withholding agent for a payment?

If several persons qualify as withholding agents for a single payment, the tax required to be withheld must only be withheld once. Generally, the person who pays (or causes to be paid) an amount subject to withholding under chapter 3 or a withholdable payment to the foreign person (or to its agent) must withhold.

Chapter 3 and Form 1099 Responsibilities

A withholding agent making a payment of U.S. source interest, dividends, rents, royalties, commissions, nonemployee compensation, other FDAP gains, profits, or income, and certain other amounts (including broker and barter exchange transactions, and certain payments made by fishing boat operators) must generally obtain from the payee either a Form W-9 or a Form W-8.

Form W-9, then must generally make an information return on a Form 1099.

Form W-8, then exempt from reporting on Form 1099, but must file Form 1042-S and withhold under the rules applicable to payments made to foreign persons.

Chapter 4 Responsibilities

A withholding agent making a chapter 4 withholdable payment to an entity payee must establish the chapter 4 status of the entity payee to determine if withholding applies by generally obtaining a Form W-8 that you can reliably associate with the payment.

A withholding agent can reliably associate a payment with a Form W-8 for purposes of establishing a payee’s chapter 4 status if, prior to the payment, the withholding agent obtains a valid form that contains the information required for chapter 4 purposes that can reliably determine how much of the payment relates to the documentation, and the withholding agent has no actual knowledge or reason to know that any of the information, certifications, or statements in, or associated with, the documentation are unreliable or incorrect for chapter 4 purposes.

NPFFI

If making a withholdable payment to an entity BUT cannot reliably associate the payment with a Form W-8 or other permitted documentation that is valid for chapter 4 purposes, then treat the entity payee as a nonparticipating FFI.

NFFE

If a withholdable payment to an NFFE, then withhold unless the NFFE (or other entity that is the beneficial owner of the payment) certifies on Form W-8 that it does not have any substantial U.S. owners or identifies its substantial U.S. owners or is a class of NFFE that certifies its status on Form W-8 to obtain an exemption from these requirements.

Requesting & Validating Form W-8

Request a Form W-8 described in these instructions from any person to whom making a payment that can be presumed or otherwise believed to be a foreign person.

Request Form W-8BEN from any foreign individual to whom you are making a payment subject to chapter 3 withholding or a withholdable payment if he or she is the beneficial owner of the income, whether or not he or she is claiming a reduced rate of, or exemption from, withholding (including under an applicable income tax treaty).

Request Form W-8BEN-E from any foreign entity to which you are making a payment of an amount subject to chapter 3 withholding or a withholdable payment if the entity is the beneficial owner of the income, whether or not it is claiming a reduced rate of, or exemption from, withholding (including under an applicable income tax treaty). For a Form W-8BEN-E that is associated with a withholdable payment to a foreign entity, obtain a valid chapter 4 status for the entity to the extent required for chapter 4 purposes to determine if withholding applies under chapter 4, and must obtain an applicable certification in Parts IV through XXVIII unless provided otherwise in the instructions for Form W-8BEN-E.

Request the form before making a payment so that the form can be reviewed when the payment is made. A completed Form W-8 must be reviewed for completeness and accuracy with respect to the claims made on the form. This responsibility extends to the information attached to Form W-8, including for Form W-8IMY, withholding statements, beneficial owner withholding certificates, or other documentation and information to the extent such documentation is required to be associated with the Form W-8IMY.

A withholding agent or payer that fails to obtain a Form W-8 or Form W-9 and fails to withhold as required under the presumption rules may be assessed tax at the 30% rate or backup withholding rate of 28%, as well as interest and penalties for lack of compliance.

FFI’s Requirement To Request Form W-8 To Document Account Holders

If an FFI maintains an account for an account holder, the FFI may be required to perform due diligence procedures to identify and document a U.S. account holder or entity account holder even if not making a payment that is a withholdable payment (or an amount subject to chapter 3 withholding) to the account holder. Forms W-8 may be used to document the chapter 4 status of a foreign account holder regardless of whether you make a payment that is a withholdable payment or an amount subject to chapter 3 withholding to the account holder, and to validate a claim of foreign status made by the account holder when the account has certain U.S. indicia.

Alternative Certifications Under an Applicable IGA

If an FFI covered under a Model 1 IGA or Model 2 IGA is using Form W-8BEN-E to document account holders pursuant to the due diligence requirements of Annex I of an applicable IGA, then may be permitted to request alternative certifications from the account holders in accordance with the requirements of and definitions applicable to the IGA to instead of the certifications in Parts IV through XXVIII of the Form W-8BEN-E (which are based on the regulations under chapter 4).

If covered by an IGA with alternative certifications, then the FFI should provide those certifications to account holders that provide a Form W-8BEN-E, and the account holder should attach the completed certification to the Form W-8BEN-E in lieu of completing a certification otherwise required in Parts IV through XXVIII of the form. In such a case, the FFI must provide a written statement to the account holder stating that the FFI has has provided the alternative certification to meet the FATCA due diligence requirements under an applicable IGA and must associate the certification with the Form W-8BEN-E.

A withholding agent (including an FFI) may also request and rely upon an alternative certification from an entity account holder to establish that the account holder is an NFFE (rather than a financial institution) under an applicable IGA. An entity providing such a certification will still be required, however, to provide its chapter 4 status (i.e., the type of NFFE) in Part I, line 5, as determined under the regulations or IGA, whichever is applicable to the withholding agent.

Alternative certification under an applicable IGA may be relied upon on unless known or have reason to know the certification is incorrect.

Substitute Forms W–8

A withholding agent may develop and use its own Form W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, or W-8IMY (a substitute form) if its content is substantially similar to the IRS’s official Form W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, or W-8IMY (to the extent required by these instructions) and it satisfies certain certification requirements. The withholding agent may even develop and use a substitute form that is in a foreign language, provided that an English translation of the form and its contents is made available to the IRS upon request. Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY may be combined into a single substitute form. A form that satisfies these substitute forms requirements may be treated as a similar agreed form for purposes of an applicable Model 1 IGA, if the partner jurisdiction does not decline such treatment.

Requirements for Obtaining and Verifying a Global Intermediary Identification Number (GIIN)

A Form W-8BEN-E from an entity payee that is identified in Part I, line 1, that is claiming chapter 4 status as a participating FFI (including a reporting Model 2 FFI) or registered deemed-compliant FFI (including a reporting Model 1 FFI), or a nonreporting IGA FFI under a Model 2 IGA, provided that the nonreporting IGA FFI is treated as a registered deemed-compliant FFI under the Model 2 IGA, must include and have verified the entity’s GIIN against the published IRS FFI list. If a withholdable payment to a direct reporting NFFE, then obtain and verify the direct reporting NFFE’s GIIN against the published IRS FFI list.

Due Diligence Requirements

The withholding agent is responsible for ensuring that all information relating to the type of income for which Form W-8 is submitted is complete and appears to be accurate and, for an entity providing the form, includes a chapter 4 status (if required as described above). In general, a withholding agent may rely on the information and certifications provided on the form (including the status of the beneficial owner as an individual, corporation, etc.) unless it has actual knowledge or reason to know that the information is unreliable or incorrect.

Reason to know that the information is unreliable or incorrect exists if the withholding agent has knowledge of relevant facts or statements contained in the withholding certificate or other documentation that would cause a reasonably prudent person in to question the claims made.

Reason to know

Reason to know that a Form W-8 is unreliable or incorrect materializes if the Form W-8 is incomplete with respect to any item that is relevant to the claims made, the form contains any information that is inconsistent with the claims made, the form lacks information necessary to establish that the beneficial owner is entitled to a reduced rate of withholding, or the withholding agent has other account information that is inconsistent with the claims made.

Period of Validity

Generally, a Form W-8 is valid from the date signed until the last day of the third succeeding calendar year.

Over 600 pages of in-depth analysis of the practical compliance aspects of financial service business providing for exchange of information of information about foreign residents with their national competent authority or with the IRS (FATCA).

The CRS contains a reporting and a due diligence standard that underpins the automatic exchange of information, very similar to FATCA.

Due diligence distinguishes between pre-existing accounts and new accounts, individual accounts and entity accounts.

Individual Accounts

Pre-existing accounts do not have a de minimis amount but are divided between low value and high value accounts.

Low Value

Low value accounts have a permanent residency based test based on documentation or, failing that, based upon indicia. If indicia are found, then either the account holder must provide self-certification or the account must be reported to all jurisdictions to which the indicia attach.

High Value

High value accounts are defined as having an aggregate balance or value of $1 million US dollars by December 31 of a calendar year. High value accounts require a paper based search as well as the test of actual knowledge of the relationship manager.

New Accounts

All new individual accounts (no de minimis) require self-certification, with confirmation of its reasonableness, which can be performed at the time of account onboarding.

Entity Accounts

Preexisting entity accounts

Preexisting entity accounts firstly need to determine if the entity is a reportable person, generally using available AML/KYC information, and if such information is not available, then a self certification will be required from the entity.

However, a preexisting entity account de minimis size of US$250,000 is available at the option of the jurisdiction adopting the CRS.

Passive entity

If the entity is a passive entity then the residency of the controlling members of the entity must be determined. Passive entity status may be determined by self-certification unless the financial institution has contra-indication information, or information is otherwise publicly available to refute the self-certification. Controlling members of the entity may be determined based upon the AML/KYC information available. Control must be interpreted in a manner consistent with the FATF standard.

New entity accounts

For new accounts, the deminimis option is not available because self-certification is easily obtainable at account opening.

Over 600 pages of in-depth analysis of the practical compliance aspects of financial service business providing for exchange of information of information about foreign residents with their national competent authority or with the IRS (FATCA).

The HNWU, which was set up in 2009, is made up of about 400 staff in 31 customer teams. HNWU deals with the tax affairs of the 6,200 wealthiest individual customers of HM Revenue and Customs (HMRC) – those with a net worth of £20 million or more.

When the unit takes ownership of a customer’s tax affairs, both the customer and their authorised tax agent or adviser will receive a letter welcoming them to HNWU. This letter also contains contact details for their Customer Relationship Manager. The relationship manager has detailed oversight over the customer and develops a close understanding of the wealthy individuals tax risks.

build relationships to better understand these customers and make it easier for them to pay the right amount of tax

tailor service delivery for these customers through proactive engagement and provide a single point of contact and a holistic approach to their tax affairs

The program, through good customer engagement with a focus on influencing behaviour, has led to voluntary compliance of the majority of customers, enabling HMRC to allocate its audit resources against noncompliant taxpayers.

Cooperative compliance means enhancing the relationship between HMRC and our customers to deliver an outcome where both parties work together to achieve the highest possible level of compliance at appropriate cost. This approach is increasingly being recommended as a feature for revenue organisations for customers with complex affairs. It reflects the growing mutual interest in being as certain as possible about tax liabilities and in ensuring that there are no surprises in any later reviews of these liabilities.

Cooperative compliance is not any kind of preferential treatment which compromises the legal position. In essence it forms part of the compliance risk management process – adding deeper and broader understanding of the world in which your client operates to our ongoing dialogue. This approach is one that we wish to have with our HNWU customers. It does of course rely on the foundation stones of a relationship characterised by trust, openness and transparency. We want to move away from only using reactive time consuming formal enquiries to a position where we can have productive pre-filing discussions which help us better understand our customers’ actions, processes and intentions.

Certainty of Positions

… The objective is to give earlier assurance, where appropriate, that we don’t intend to open an enquiry or don’t require further information. Where we are able, we will write to you and your client if no further action is needed to let you know this, rather than letting you wait until the end of the statutory enquiry period. This is more likely to be the case where we have established an ongoing dialogue about your client’s tax affairs. Customers who participated in the trial were positive about the benefits of this approach.

On July 16, 2014 Nina Olson, the Taxpayer Advocate released her midyear report to Congress. Volume 2 of the report contains the IRS’s responses to the administrative recommendations the National Taxpayer Advocate made in her 2013 annual report to Congress, along with additional TAS comments.

Individual Taxpayer Identification Numbers (ITINs)

The Taxpayer Advocated noted that in November 2012, the IRS announced permanent changes to its application procedures for ITINs. As a result, found the Taxpayer Advocate, dependent ITIN applicants now face a substantial burden because they can no longer use a certifying acceptance agent (CAA) to certify their documents. Dependents must mail original documents or copies certified by the issuing agency, or have the documents certified at an IRS taxpayer assistance center (TAC) or at one of just four U.S. tax attaché offices overseas.

What is an ITIN?

An Individual Taxpayer Identification Number (ITIN) is a tax processing number issued by the Internal Revenue Service. It is a nine-digit number that always begins with the number 9 and has a range of 70-88 in the fourth and fifth digit. The range was extended to include 900-70-0000 through 999-88-9999, 900-90-0000 through 999-92-9999 and 900-94-0000 through 999-99-9999.

The IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number (SSN) from the Social Security Administration (SSA). ITINs are issued regardless of immigration status because both resident and nonresident aliens may have a U.S. filing or reporting requirement under the Internal Revenue Code. Individuals must have a filing requirement and file a valid federal income tax return to receive an ITIN, unless they meet an exception.

What is an ITIN used for?

ITINs are for federal tax reporting only, and are not intended to serve any other purpose. IRS issues ITINs to help individuals comply with the U.S. tax laws, and to provide a means to efficiently process and account for tax returns and payments for those not eligible for Social Security Numbers (SSNs). See my previous article on completing the W-8BEN.

An ITIN does not authorize work in the U.S. or provide eligibility for Social Security benefits or the Earned Income Tax Credit.

Who needs an ITIN?

IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs. A non-resident alien individual not eligible for a SSN who is required to file a U.S. tax return only to claim a refund of tax under the provisions of a U.S. tax treaty needs an ITIN. IRS processes returns showing SSNs or ITINs in the blanks where tax forms request SSNs. IRS does not accept, and will not process, forms showing “SSA”, 205c”, “applied for”, “NRA”, & blanks, etc.

Other examples of individuals who need ITINs include:

A nonresident alien required to file a U.S. tax return

A U.S. resident alien (based on days present in the United States) filing a U.S. tax return

A dependent or spouse of a U.S. citizen/resident alien

A dependent or spouse of a nonresident alien visa holder

If a person does not have a SSN and is not eligible to obtain a SSN, but has a requirement to furnish a federal tax identification number or file a federal income tax return, then that person must apply for an ITIN. By law, an alien individual cannot have both an ITIN and a SSN.

From January through October 2013, applicants filed only one million ITIN applications with returns, compared to 1.8 million during the same period in 2012. During this period, ITIN applications and accompanying returns declined nearly 50%, while the percentage of applications rejected by the IRS soared to 50.2%.

The Taxpayer Advocate reports that an explanation for these numbers is the burden caused by the new ITIN procedures.

ITIN applicants report problems, including a lack of communication about why the IRS suspended or rejected an application, an inability to speak with IRS employees, a lack of notice about the status of the application, the rejection of applications with legitimate supporting documents, and lost original documents. The IRS’s policy of generally accepting ITIN applications only during the filing season forces the IRS to process applications under short timelines and does not provide sufficient time to review them for potential fraud.

The IRS stated in response that it does not plan to pursue electronic filing of the ITIN application. The IRS provided several reasons why its Form W-7, Application for IRS Individual Taxpayer Identification Number (ITIN) is not a suitable candidate for electronic filing:

In order to strengthen the ITIN program, when requesting an ITIN taxpayers are required to submit documentation that supports the information provided on the Form W-7. The applicant can submit original documents or certified copies from the issuing agency. The attachment of an electronic copy of the documents, such as a .pdf version of the supporting documentation, will not allow IRS to authenticate the documents as outlined in IRM 3.21.263. In addition, taxpayers are required to submit their original tax return(s) for which the ITIN is needed with the W-7 attached. The Modernized e-File (MeF) system is not able to accept both the W-7 and associated tax return(s) in the same transaction.

IRS Cancelling Unused ITINs

Individual Taxpayer Identification Numbers (ITINs) will expire if not used on a federal income tax return for five consecutive years, the Internal Revenue Service announced today. To give all interested parties time to adjust and allow the IRS to reprogram its systems, the IRS will not begin deactivating ITINs until 2016.

The new, more uniform policy applies to any ITIN, regardless of when it was issued. Only about a quarter of the 21 million ITINs issued since the program began in 1996 are being used on tax returns. The new policy will ensure that anyone who legitimately uses an ITIN for tax purposes can continue to do so, while at the same time resulting in the likely eventual expiration of millions of unused ITINs.

ITINs play a critical role in the tax administration system and assist with the collection of taxes from foreign nationals, resident and nonresident aliens and others who have filing or payment obligations under U.S. law. Designed specifically for tax administration purposes, ITINs are only issued to people who are not eligible to obtain a Social Security Number.

Under the new policy:

An ITIN will expire for any taxpayer who fails to file a federal income tax return for five consecutive tax years.

Any ITIN will remain in effect as long as a taxpayer continues to file U.S. tax returns. This includes ITINs issued after Jan. 1, 2013. These taxpayers will no longer face mandatory expiration of their ITINs and the need to reapply starting in 2018, as was the case under the old policy.

To ease the burden on taxpayers and give their representatives and other stakeholders time to adjust, the IRS will not begin deactivating unused ITINs until 2016. This grace period will allow anyone with a valid ITIN, regardless of when it was issued, to still file a valid return during the upcoming tax-filing season.

A taxpayer whose ITIN has been deactivated and needs to file a U.S. return can reapply using Form W-7. As with any ITIN application, original documents, such as passports, or copies of documents certified by the issuing agency must be submitted with the form.

Over 600 pages of in-depth analysis of the practical compliance aspects of financial service business providing for exchange of information of information about foreign residents with their national competent authority or with the IRS (FATCA),

Benjamin M. Lawsky, Superintendent of Financial Services, announced July 17, 2014 that the New York State Department of Financial Services (DFS) has issued for public comment a proposed “BitLicense” regulatory framework for New York virtual currency businesses. The proposed regulatory framework – which is the product of a nearly year-long DFS inquiry, including public hearings that the Department held in January 2014 – contains consumer protection, anti-money laundering compliance, and cyber security rules tailored for virtual currency firms.

The new DFS BitLicenses will be required for firms engaged in the following virtual currency businesses:

Receiving or transmitting virtual currency on behalf of consumers;

Securing, storing, or maintaining custody or control of such virtual currency on the behalf of customers;

Performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency;

Buying and selling Virtual Currency as a customer business (as distinct from personal use); or

Controlling, administering, or issuing a Virtual Currency. (Note: This does not refer to virtual currency miners.)

The license is not requiredfor merchants or consumers that utilize Virtual Currency solely for the purchase or sale of goods or services; or those firms chartered under the New York Banking Law to conduct exchange services and are approved by DFS to engage in Virtual Currency business activity.

Key requirements for firms holding BitLicenses include:

Safeguarding Consumer Assets. Each firm must hold Virtual Currency of the same type and amount as any Virtual Currency owed or obligated to a third party. Companies are also prohibited from selling, transferring, assigning, lending, pledging, or otherwise encumbering assets, including Virtual Currency, it stores on behalf of another person. Each licensee must also maintain a bond or trust account in United States dollars for the benefit of its customers in such form and amount as is acceptable to DFS for the protection of the licensee’s customers.

Virtual Currency Receipts. Upon completion of any transaction, each firm shall provide to a customer a receipt containing the following information: (1) the name and contact information of the firm, including a telephone number established by the Licensee to answer questions and register complaints; (2) the type, value, date, and precise time of the transaction; (3) the fee charged; (4) the exchange rate, if applicable; (5) a statement of the liability of the Licensee for non-delivery or delayed delivery; (6) a statement of the refund policy of the Licensee.

Consumer Complaint Policies. Each firm must establish and maintain written policies and procedures to resolve consumer complaints in a fair and timely manner. The company must also provide notice to consumers, in a clear and conspicuous manner, that consumers can bring complaints to DFS’s attention for further review and investigation.

Consumer Disclosures. Companies must provide clear and concise disclosures to consumers about potential risks associated with virtual currencies, including the fact that: transactions in Virtual Currency are generally irreversible and, accordingly, losses due to fraudulent or accidental transactions may not be recoverable; the volatility of the price of Virtual Currency relative to Fiat Currency may result in significant loss or tax liability over a short period of time; there is an increased risk of loss of virtual currency due to cyber attacks; virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to FDIC or SIPC protections; among others.

Anti-money Laundering Compliance. As part of its anti-money laundering compliance program, each firm shallmaintain the following information for all transactions involving the payment, receipt, exchange or conversion,purchase, sale, transfer, or transmission of Virtual Currency: (1) the identity and physical addresses of the parties involved; (2) the amount or value of the transaction, including in what denomination purchased, sold, or transferred, and the method of payment; (3) the date the transactionwas initiated and completed, and (4)a description of the transaction.

Verification of Accountholders. Firms must, at a minimum, when opening accounts for customers, verify their identity, to the extent reasonable and practicable, maintain records of the information used to verify such identity, including name, physical address, and other identifying information, and check customers against the Specially Designated Nationals (“SDNs”) list maintained by the U.S. Treasury Department’s Office of Foreign Asset Control (“OFAC”). Enhanced due diligence may be required based on additional factors, such as for high-risk customers, high-volume accounts, or accounts on which a suspicious activity report has been filed. Firms are also subject to enhanced due diligence requirements for accounts involving foreign entities and a prohibition on accounts with foreign shell entities.

Reporting of Suspected Fraud and Illicit Activity. Each Licensee shall monitor for transactions that might signify money laundering, tax evasion, or other illegal or criminal activity and notify the Department, in a manner prescribed by the superintendent, immediately upon detection of such a transactions. When a Licensee is involved in a transaction or series of transactions for the receipt, exchange or conversion, purchase, sale, transfer, or transmission of Virtual Currency, in an aggregate amount exceeding the United States dollar value of $10,000 in one day, by one Person, the Licensee shall also notify the Department, in a manner prescribed by the superintendent, within 24 hours. In meeting its reporting requirements Licensees must utilize an approved methodology when calculating the value of Virtual Currency in Fiat Currency.

Cyber Security Program: Each licensee must maintain a cyber security program designed to perform a set of core functions, including: identifying internal and external cyber risks; protecting systems from unauthorized access or malicious acts; detecting systems intrusions and data breaches; and responding and recovering from any breaches, disruptions, or unauthorized use of systems. Among other safeguards, each firm shall also conduct penetration testing of its electronic systems, at least annually, and vulnerability assessment of those systems, at least quarterly.

Independent DFS Examinations: Examinations of licensees will be conducted whenever the superintendent deems necessary – but no less than once every two calendar years – to determine the licensee’s financial condition, safety and soundness, management policies, and compliance with laws and regulations.

Books and Records: Licensees are required to keep certain books and records, including transaction information, bank statements, records or minutes of the board of directors or governing body, records demonstrating compliance with applicable laws including customer identification documents, and documentation related to investigations of consumer complaints.

Reports and Financial Disclosures, Audit Requirements. Each firm must submit to DFS quarterly financial statements within 45 days following the close of the Licensee’s fiscal quarter. Each firm must also submit audited annual financial statements, prepared in accordance with generally accepted accounting principles, together with an opinion of an independent certified public accountant and an evaluation by such accountant of the accounting procedures and internal controls of the firm within 120 days of its fiscal year end.

Capital Requirements: Necessary capital requirements will be determined by DFS based on a variety of factors, including the composition of the licensee’s total assets and liabilities, whether the licensee is already licensed or regulated by DFS, the amount of leverage used by the firm, the liquidity position of the firm, and extent to which additional financial protection is provided for customers.

Compliance Officer. Each Licensee shall designate a qualified individual or individuals responsible for coordinating and monitoring compliance with NYDFS’ BitLicense regulatory framework and all other applicable federal and state laws, rules, and regulations.

Business Continuity and Disaster Recovery. Each Licensee shall establish and maintain a written business continuity and disaster recovery plan reasonably designed to ensure the availability and functionality of the Licensee’s services in the event of an emergency or other disruption to the Licensee’s normal business activities.

Notification of Emergencies or Disruptions.Each firm must promptly notify DFS of any emergency or other disruption to its operations that may affect its ability to fulfill regulatory obligations or that may have a significant adverse effect on the Licensee, its counterparties, or the market.

Transitional Period. Applications for the license will be accepted beginning on the date the proposed regulations become effective. Those already engaged in virtual currency business activity will have a 45-day transitional period to apply for a license from the date regulations become effective. The superintendent will issue or deny the license within 90 days of a complete application submission.

A three judge U.S. Court of Appeals for the District of Columbia panel unanimously upholding the District Court decision that Stanford International Bank CD Investors do not meet the definition of “customer” under the Securities Investor Protection Act (SIPA). Thus, the Securities Investor Protection Corporation (SIPC) will not cover the losses of Stanford investors, up to the maximum statutory amount of $500,000 for securities.

What is the SIPC?

SIPC was created under the Securities Investor Protection Act as a non-profit membership corporation. SIPC oversees the liquidation of member broker-dealers that close when the broker-dealer is bankrupt or in financial trouble, and customer assets are missing.

In a liquidation under the Securities Investor Protection Act, SIPC and the court-appointed Trustee work to return customers’ securities and cash as quickly as possible. Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only).

Although created under a federal law, SIPC is not an agency or establishment of the United States Government, and it has no authority to investigate or regulate its member broker-dealers.

In the event of the refusal of SIPC to commit its funds or otherwise to act for the protection of customers of any member of SIPC, the Commission may apply to the district court of the United States in which the principal office of SIPC is located for an order requiring SIPC to discharge its obligations under this chapter and for such other relief as the court may deem appropriate to carry out the purposes of this chapter.

What are the facts?

7,000 investors, on the advice of an SEC registered broker dealer Stanford Group Company (Houston, Texas) (“SGC”) that was a member of the SIPC, invested in certificates of deposit (CDs) issued by an Antigua based Stanford International Bank LLC (“SIBL”), not a member of the SIPC.

The CDs are debt assets that promised a fixed rate of return. The SIBL CD disclosure statements stated that the products are not covered by the investor protection or securities insurance laws of any jurisdiction such as the U.S. Securities Investor Protection Insurance [sic] Corporation.

What is the central issue?

The central issue in this appeal is whether investors who purchased SIBL CDs at the suggestion of SGC employees qualify as SGC “customers” under the SIPA, that SIPC may be ordered to cover their losses up to the statutory maximum.

What did the SIPC argue to exclude its protection?

In SIPC’s view, the CD investors were not SGC “customers” within the meaning of the Act, a precondition to liquidation of SGC. SIPC explained that the Act “protects the ‘custody’ function that brokerage firms perform for customers.” Here, SIPC concluded, the circumstances fell outside the Act’s custody function because SGC itself never held investors’ cash or securities in connection with their purchase of the CDs. Rather, “cash for the purpose of purchasing CDs . . . was sent to SIBL, which is precisely what the customer intended.” As for the “physical CDs,” they presumably “were issued to, and delivered to” the investors, and SGC did not “maintain[] possession or control of the CDs.” (citation removed)

Why did the SEC seek to extend SIPC protection?

SEC reached the opposite conclusion. In June 2011, the Commission issued a formal analysis stating that investors who had purchased SIBL CDs at the urging of SGC employees qualified as SGC “customers” under the Act. Citing evidence that Stanford had “structured the various entities in his financial empire . . . for the principal, if not sole,purpose of carrying out a single fraudulent Ponzi scheme,” the Commission determined that the “separate existence” of SIBL and SGC “should be disregarded.” (citation removed) ….

The Commission grounds its argument for disregarding the corporate separateness of SIBL and SGC in the doctrine of “substantive consolidation,” an equitable doctrine typically applied in bankruptcy proceedings. “In general, substantive consolidation results in the combination of the assets of [two] debtors into a single pool from which the claims of creditors of both debtors are satisfied ratably.” 2 Collier on Bankruptcy ¶ 105.09[3], at 105-110–11…. Courts have employed a “variety” of tests when assessing whether to grant substantive consolidation. (citation removed) ….

The doctrine of substantive consolidation has been applied in SIPA liquidations. In New Times I, for instance, the bankruptcy court substantively consolidated a SIPC-memberbroker undergoing liquidation with a related, non-broker entity. The assets of the related entity were brought into the SIPC member’s liquidation estate, enlarging the available pool for customer recovery. Investors with cash on deposit with the non-broker entity were treated as “customers” in the liquidation, even though the member broker itself never held those investors’ funds. (citation removed) ….

(i) any person who has deposited cash with the debtor for the purpose of purchasing securities;

(ii) any person who has a claim against the debtor for cash, securities, futures contracts, or options on futures contracts received, acquired, or held in a portfolio margining account carried as a securities account pursuant to a portfolio margining program approved by the Commission; and

(iii) any person who has a claim against the debtor arising out of sales or conversions of such securities.

(C) Excluded Persons

The term ‘customer’ does not include any person, to the extent that-

(i) the claim of such person arises out of transactions with a foreign subsidiary of a member of SIPC; or

(ii) such person has a claim for cash or securities which by contract, agreement, or understanding, or by operation of law, is part of the capital of the debtor, or is subordinated to the claims of any or all creditors of the debtor, notwithstanding that some ground exists for declaring such contract, agreement, or understanding void or voidable in a suit between the claimant and the debtor.

As summarized by one leading treatise, the SIPA statute “attempts to protect customer interests in securities and cash left with broker-dealers….” Loss & Seligman, Securities Regulation ¶ 8.B.5.a, p. 3290 (3rd ed.2003) (citing legislative history) (emphasis added). Another prominent treatise states that “SIPA is designed to protect securities investors against losses stemming from the failure of an insolvent or otherwise failed broker-dealer to properly perform its role as the custodian of customer cash and securities.” 1–12 Collier on Bankruptcy, P. 12.01 (16th ed.) (emphasis added). The usage of the phrase “left with” in the first description and of the term “custodian” in the second description is notable—both usages are in accordance with the plain meaning of statutory term “deposit,” which is “to place esp. for safekeeping or as a pledge” or “[to] giv[e] money or other property to another who promises to preserve it or to use it and return it in kind.” (citation omitted)

Accordingly, it is well settled that “the critical aspect of the ‘customer’ definition is the entrustment of cash or securities to the broker-dealer for the purposes of trading securities.” The “customer” definition has therefore been described as “embodying a common-sense concept: An investor is entitled to compensation from the SIPC only if he has entrusted cash or securities to a broker-dealer who becomes insolvent; if an investor has not so entrusted cash or securities, he is not a customer and therefore not entitled to recover from the SIPC trust fund.” To prove entrustment, the claimant must prove that the SIPC member actually possessed the claimant’s funds or securities. (citation omitted)

What did the Appeals Court’s rule?

When a brokerage firm faces insolvency, the cash and securities it holds for its customers can become ensnared in bankruptcy liquidation proceedings or otherwise be put at risk. Congress established the Securities Investor Protection Corporation (SIPC) to protect investors’ assets held on deposit by financially distressed brokerage firms. SIPC can initiate its own liquidation proceedings with the aim of securing the return of customers’ property held by the brokerage. SIPC, however, possesses authority to undertake those protective measures only with respect to member brokerage firms. Its authority does not extend to non-member institutions.

In this case, the Securities and Exchange Commission seeks a court order compelling SIPC to liquidate a member broker dealer, Stanford Group Company (SGC). SGC played an integral role in a multibillion-dollar financial fraud carried out through a web of companies. SGC’s financial advisors counseled investors to purchase certificates of deposit from an Antiguan bank that was part of the same corporate family. The Antiguan bank’s CDs eventually became worthless. The massive Stanford fraud spawned a variety of legal actions in a number of arenas, the bulk of which are not at issue here. This case involves the authority of a specific entity—SIPC—to take measures within its own statutorily bounded sphere. As to that issue, because the Antiguan bank, unlike SGC, was not a SIPC member, SIPC had no ability to initiate measures directly against the bank to protect the property of investors who purchased the bank’s CDs.

The question in this case is whether SIPC can instead be ordered to proceed against SGC—rather than the Antiguan bank—to protect the CD investors’ property. It is common ground that SIPC can be compelled to do so only if those investors qualify as “customers” of SGC within the meaning of the governing statute. SIPC concluded that they do not, and the district court agreed. The court reasoned that the investors obtained the Antiguan bank’s CDs by depositing funds with the bank itself, not with SGC, and they thus cannot be considered customers of the latter. We agree that the CD investors do not qualify as customers of SGC under the operative statutory definition. We therefore affirm the denial of the application to order SIPC to liquidate SGC.

What was the Appeals Court analysis for the term ‘Customer”?

To come within the fold of SIPA’s protections, an investor thus ordinarily must demonstrate both that the broker “actually . . . received, acquired or held the claimant’s property, and that the transaction giving rise to the claim . . . contain[ed] the indicia of a fiduciary relationship” between the investor and the broker. 1 Collier on Bankruptcy ¶ 12.12[2], at 12-50. An investor’s “customer” status is evaluated on an asset-by-asset basis and may change over time.

Here, insofar as the analysis focuses on the entity that in fact held custody over the property of the SIBL CD investors, the investors fail to qualify as “customers” of SGC under the statutory definition. That is because SGC never “received, acquired, or held” the investors’ cash or securities. With regard to the investors’ cash, it is undisputed that investors at no time deposited funds with SGC to purchase the SIBL CDs. The funds instead went to SIBL. (citation omitted)

What about the SEC’s Argument for group consolidation?

Even if we were to consolidate, however, SIBL CD investors would not be “customers” of a SIPC-member entity under the statutory definition. The Act specifically excludes from “customer” status “any person, to the extent that . . . such person has a claim for cash or securities which by contract, agreement, or understanding, or by operation of law, is part of the capital of the debtor.” We, like other courts, understand that provision to establish that “a claimant cannot qualify for customer status under SIPA to the extent that he or she is a lender rather than an investor.” As the Eleventh Circuit has explained, “[c]ash that is simply lent to the brokerage cannot form the basis of a SIPA customer claim because the statute’s definition of ‘customer’ excludes individuals whose claims are for ‘cash . . . which . . . is part of the capital of the debtor.’” (citation omitted)

Here, investors who purchased SIBL CDs lent funds to SIBL that became part of SIBL’s capital: Those investors gave cash to SIBL in exchange for a promise to be repaid with a fixed rate of return. The investors invested “in,” not “through,” SIBL. … Under a consolidated view, investors who purchased SIBL CDs lent money to the consolidated SIBL/SGC entity, forming a “creditor-debtor arrangement.” The CD proceeds thus became part of the consolidated entity’s “capital,” triggering the statutory exclusion from “customer” status for lenders. (citation omitted)

On July 14, 2014 the Securities and Exchange Commission (SEC) filed a public administrative and cease-and-desist proceedings against Ernst & Young (E&Y) for E&Y’s violation of audit independence conduct regarding legislative lobbying on behalf of its audit clients.

E&Y has agreed to pay disgorgement of $1,240,000, together with prejudgment interest thereon of $351,925.98, and a civil money penalty of $2,480,000, for a total of $4,071,925.98 and it has agreed to cease & desist the activity. See http://www.sec.gov/litigation/admin/2014/34-72602.pdf

The SEC public administrative and cease-and-desist proceedings against E&Y arose out of certain legislative advisory services provided by Washington Council EY (“WCEY”), which has been part of EY since 2000. Prior to 2009, certain conduct related to WCEY’s provision of legislative advisory services violated the independence rules with respect to two of EY’s SEC-registrant audit clients.

WCEY sent letters urging passage of bills to congressional staff on behalf of one of its clients. These bills were important to this client’s business interests. WCEY also asked congressional staff to insert into a bill a provision favorable to this client.

For another audit client, WCEY attempted to persuade congressional offices to withdraw their support for legislation detrimental to that client’s business interests. In addition, WCEY worked closely with congressional staff in drafting an alternative bill more favorable for the client. WCEY also marked up a draft of the alternative bill, inserting specific language written by the client and sent the mark-up to congressional staff.

Despite providing the services described herein, E&Y repeatedly represented that it was “independent” in audit reports issued the clients’ financial statements.

After a nine-year criminal investigation by the DEA and FDA, on July 17, 2014 the US Attorney for the Northern District of California filed a criminal indictment by a federal grand jury against FedEx Corporation, FedEx Express, Inc., and FedEx Corporate Services, Inc., for conspiracies to traffic in controlled substances and misbranded prescription drugs for its role in distributing controlled substances and prescription drugs for illegal Internet pharmacies.

If found guilty, the Fed Ex defendants face a maximum sentence of 5 years of probation, and a fine of up to $1.6 billion representing twice the gross gain derived from the offense, alleged in the indictment to be at least $820 million. FedEx would also be liable for restitution to victims of the crime, as well as forfeiture of the gross proceeds of the offense and any facilitating property.

The alleged actions taken by Fed Ex to traffic in controlled substances include:

FedEx established an Online Pharmacy Credit Policy to protect against large balances owed to FedEx.

FedEx established a Sales policy to protect its sales professionals commission-based compensation caused by online pharmacies moving shipping locations to avoid detection by the DEA.

FedEx adopted a procedure whereby Internet pharmacy packages from problematic shippers were held for pick up at specific stations.

FedEx’s employees knew that online pharmacies and fulfillment pharmacies affiliated with both the Chhabra-Smoley organization and Superior Drugs were closed down by state and federal law enforcement agencies and that their owners, operators, pharmacists, and doctors were indicted, arrested and convicted of illegally distributing drugs.

… In 2004, FedEx established an Online Pharmacy Credit Policy requiring that all online pharmacy shippers be approved by the Credit Department prior to opening a new account. The stated reason for this policy was that many Internet pharmacies operated outside federal and state regulations over the sale of controlled drugs and many sites had been shut down by the government without warning, leaving a large balance owed to FedEx. According to the indictment, FedEx also established a Sales policy in which all online pharmacies were assigned to a “catchall” classification to protect the commission-based compensation of its sales professionals from the volatility caused by online pharmacies moving shipping locations often to avoid detection by the DEA.

According to the indictment, as early as 2004, FedEx knew that it was delivering drugs to dealers and addicts. FedEx’s couriers in Kentucky, Tennessee, and Virginia expressed safety concerns that were circulated to FedEx Senior management, including that FedEx trucks were stopped on the road by online pharmacy customers demanding packages of pills, that the delivery address was a parking lot, school, or vacant home where several car loads of people were waiting for the FedEx driver to arrive with their drugs, that customers were jumping on the FedEx trucks and demanding online pharmacy packages, and that FedEx drivers were threatened if they insisted on delivering packages to the addresses instead of giving the packages to customers who demanded them. In response to these concerns, FedEx adopted a procedure whereby Internet pharmacy packages from problematic shippers were held for pick up at specific stations, rather than delivered to the recipient’s address.

FedEx is charged in the indictment with conspiring with two separate but related Internet pharmacy organizations: the Chhabra-Smoley Organization, from 2000 through 2008, and Superior Drugs, from 2002 through 2010. In each case, FedEx is alleged to have knowingly and intentionally conspired to distribute controlled substances and prescription drugs, including Phendimetrazine (Schedule III); Ambien, Phentermine, Diazepam, and Alprazolam (Schedule IV), to customers who had no legitimate medical need for them based on invalid prescriptions issued by doctors who were acting outside the usual course of professional practice.

According to the indictment, FedEx began delivering controlled substances and prescription drugs for Internet pharmacies run by Vincent Chhabra, including RxNetwork and USA Prescription, in 2000. When Chhabra was arrested in December of 2003 for illegally distributing controlled substances based on a doctor’s review of an on-line questionnaire, Robert Smoley took over the organization and continued the illegal distribution of controlled substances and prescription drugs through FedEx.

According to the indictment, FedEx began delivering controlled substances and prescription drugs for Superior Drugs in 2002. FedEx’s employees knew that Superior Drugs filled orders for online pharmacies that sold controlled substances and prescription drugs to consumers without the need for a face-to-face meeting with, or physical examination or laboratory tests by, a physician.

According to the indictment, FedEx’s employees knew that online pharmacies and fulfillment pharmacies affiliated with both the Chhabra-Smoley organization and Superior Drugs were closed down by state and federal law enforcement agencies and that their owners, operators, pharmacists, and doctors were indicted, arrested and convicted of illegally distributing drugs. Nevertheless, FedEx continued to deliver controlled substances and prescription drugs for the Chhabra-Smoley organization and Superior Drugs.

“The advent of Internet pharmacies allowed the cheap and easy distribution of massive amounts of illegal prescription drugs to every corner of the United States, while allowing perpetrators to conceal their identities through the anonymity the Internet provides,” said U.S. Attorney Melinda Haag. “This indictment highlights the importance of holding corporations that knowingly enable illegal activity responsible for their role in aiding criminal behavior.”

“Pharmaceutical drug abuse is a serious problem affecting millions of consumers in the United States,” said DEA Special Agent in Charge Jay Fitzpatrick. “While DEA is committed to ensuring patients receive legitimate prescriptions, today’s action should send a strong message that corporations that participate in illegal activity risk investigation and prosecution.”

“Illegal Internet pharmacies rely on illicit Internet shipping and distribution practices. Without intermediaries, the online pharmacies that sell counterfeit and other illegal drugs are limited in the harm they can do to consumers,” said Philip J. Walsky, Acting Director, FDA’s Office of Criminal Investigations. “The FDA is hopeful that today’s action will continue to reinforce the message that the public’s health takes priority over a company’s profits.”

…We have repeatedly requested that the government provide us a list of online pharmacies engaging in illegal activity. Whenever DEA provides us a list of pharmacies engaging in illegal activity, we will turn off shipping for those companies immediately. So far the government has declined to provide such a list.

FedEx transports more than 10 million packages a day. The privacy of our customers is essential to the core of our business. This privacy is now at risk, based on the charges by the Department of Justice related to the transportation of prescription medications.

We want to be clear what’s at stake here: the government is suggesting that FedEx assume criminal responsibility for the legality of the contents of the millions of packages that we pick up and deliver every day. We are a transportation company – we are not law enforcement. We have no interest in violating the privacy of our customers. We continue to stand ready and willing to support and assist law enforcement. We cannot, however, do the job of law enforcement ourselves.

Both UPS and Google settled their investigations relating to online pharmacy business, $40 million (2013) and $500 million (2011) respectively. UPS established an Online Pharmacy Compliance Officer pursuant to its settlement with the DEA and DOJ. The Google investigation had its origins in a separate, multimillion dollar financial fraud investigation unrelated to Google, the main target of which fled to Mexico. While a fugitive, he began to advertise the unlawful sale of drugs through Google’s AdWords program. After being apprehended in Mexico and returned to the United States by the U.S. Secret Service, he began cooperating with law enforcement and provided information about his use of the AdWords program. During the ensuing investigation of Google, the government established a number of undercover websites for the purpose of advertising the unlawful sale of controlled and non-controlled substances through Google’s AdWords program.

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook with commentary and analysis by hundreds of AML experts from over 100 countries, is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation. As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities.

The Progress Report concluded that a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 127 (45.4%) have been missed and 153 (54.6%) have been met with finalized rules.

In addition, 208 (52.3%) of the 398 total required rulemakings have been finalized, while 96 (24.1%) rulemaking requirements have not yet been proposed.

On July 15, 2014 FBME Bank, a $2 billion asset size Tanzanian institution that conducts 90% of its business and holds 90% of its assets in Cyprus, has been named by FINCEN as a foreign financial institution of “primary money laundering concern” pursuant to Section 311 of the USA PATRIOT Act. FINCEN proposes to prohibit US financial institutions from opening or maintaining correspondent accounts for or on behalf of FBME, effectively shutting FBME out of the US financial system.

What is FBME Bank?

FBME was established in 1982 in Cyprus as the Federal Bank of the Middle East, Ltd., a subsidiary of the private Lebanese bank, Federal Bank of Lebanon. Both FBME and the Federal Bank of Lebanon are owned by Ayoub-Farid M. Saab and Fadi M. Saab.

Who Regulates FBME Bank?

FBME, via its Cypriot branches, are licensed and regulated by the Cyprus Central Bank. According to a Wall Street Journal report of March 4, 2013, FBME acquired €240 million of Cypriot government junk bonds at the height of the 2011 Cypriot financial crisis, representing 13% of FBME’s balance sheet. In 2012, on the day of Parliament’s announcement of the Cyprus financial system bailout WJS noted, FBME coincidently moved its headquarters to Cyprus and applied for a full banking license that would allow it EU wide distribution.

18 months later, in November 2013, the Cyprus Central Bank stated that FBME may be subject to sanctions and a fine of up to €240 million for alleged violations of Cypriot capital controls put in place with the bailout. But FINCEN pointed out that in just the year from April 2013 through April 2014, FBME conducted at least $387 million in wire transfers through the U.S. financial system that exhibited indicators of high-risk money laundering typologies, including widespread shell company activity, short-term “surge” wire activity, structuring, and high-risk business customers. FBME was involved in at least 4,500 suspicious wire transfers through U.S. correspondent accounts that totaled at least $875 million between November 2006 and March 2013.

What Money Laundering Is FBME Allegedly Involved With ?

FINCEN alleges:

In 2008, an FBME customer received a deposit of hundreds of thousands of dollars from a financier for Lebanese Hezbollah.

As of 2008, a financial advisor for a major transnational organized crime figure who banked entirely at FBME in Cyprus maintained a relationship with the owners of FBME.

FBME facilitated transactions for entities that perpetrate fraud and cybercrime against victims from around the world, including in the United States. For example, in 2009, FBME facilitated the transfer of over $100,000 to an FBME account involved in a High Yield Investment Program (“HYIP”) fraud against a U.S. person.

In September 5 2010, FBME facilitated the unauthorized transfer of over $100,000 to an FBME account from a Michigan-based company that was the victim of a phishing attack.

Since at least early 2011, the head of an international narcotics trafficking and money laundering network has used shell companies’ accounts at FBME to engage in financial activity.

Several FBME accounts have been the recipients of the proceeds of cybercriminal activity against U.S. victims. For example, in October 2012, an FBME account holder operating as a shell company was the intended beneficiary of over $600,000 in wire transfers generated from a fraud scheme, the majority of which came from a victim in California.

FBME facilitates U.S. sanctions evasion through its extensive customer base of shell companies. For example, at least one FBME customer is a front company for a U.S.-sanctioned Syrian entity, the Scientific Studies and Research Center (“SSRC”), which has been designated as a proliferator of weapons of mass destruction

Update of July 19: Yesterday, the Cypriot Central Bank took control of FMBE’s Cypriot branch operations. FMBE, denying the FINCEN allegations, responded as follows:

FBME Bank commissioned a detailed assessment by the German office of a leading international accountancy firm into its operations and practices, which found that the Bank’s services are indeed in compliance with applicable AML rules of the Central Bank of Cyprus and the European Union.

FBME Bank welcomes the involvement of its regulator, is cooperating fully with it and reiterates its absolute continued commitment to full compliance with applicable laws and regulations.

FBME Bank continues to comply with European Capital Adequacy and Liquidity Standards and other healthy balance sheet ratios.

This academic looks forward to FBME making available the detailed assessment of the leading international accountancy firm that FBME’s side of the story may be known.

“FBME promotes itself on the basis of its weak Anti-Money Laundering (AML) controls in order to attract illicit finance business from the darkest corners of the criminal underworld.” … “Unfortunately, this business plan has been far too successful. But today’s action, effectively shutting FBME off from the U.S. financial system, is a necessary step to disrupt the bank’s efforts and send the message that the United States will not stand by while financial institutions help those who intend to harm or threaten Americans.”

In its Notice of Finding, FINCEN stated “FBME is used by its customers to facilitate money laundering, terrorist financing, transnational organized crime, fraud, sanctions evasion, and other illicit activity internationally and through the U.S. financial system.”

FINCEN Proposes Shutting FBME Out of US Financial System

In its Notice of Proposed Rulemaking, FINCEN states that it intends to impose the fifth, special measure allowed by Section 311 of the USA PATRIOT Act (“Section 311”). FINCEN’s Director has the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, institution, class of transaction, or type of account is of “primary money laundering concern,” to require domestic financial institutions and financial agencies to take certain “special measures” to address the primary money laundering concern.

The fifth special measure would prohibit covered financial institutions from opening or maintaining correspondent accounts for or on behalf of FBME Currently, only one U.S. covered financial institution maintains an account for FBME. FINCEN’s fifth measure entails as follows:

Covered financial institutions also would be required to take reasonable steps to apply special due diligence .. to all of their correspondent accounts to help ensure that no such account is being used to provide services to FBME. For direct correspondent relationships, this would involve a minimal burden in transmitting a one-time notice to certain foreign correspondent account holders concerning the prohibition on processing transactions involving FBME through the U.S. correspondent account.

U.S. financial institutions generally apply some level of screening and, when required, conduct some level of reporting of their transactions and accounts, often through the use of commercially-available software such as that used for compliance with the economic sanctions programs administered by the Office of Foreign Assets Control (“OFAC”) of the Department of the Treasury and to detect potential suspicious activity. To ensure that U.S. financial institutions are not being used unwittingly to process payments for or on behalf of FBME, directly or indirectly, some additional burden will be incurred by U.S. financial institutions to be vigilant in their suspicious activity monitoring procedures. …

A covered financial institution may satisfy the notification requirement by transmitting the following notice to its foreign correspondent account holders that it knows or has reason to know provide services to FBME:

Notice: Pursuant to U.S. regulations issued under Section 311 of the USA PATRIOT Act, see 31 CFR 1010.661, we are prohibited from establishing, maintaining, administering, or managing a correspondent account for or on behalf of FBME Bank Ltd. The regulations also require us to notify you that you may not provide FBME Bank Ltd. or any of its subsidiaries with access to the correspondent account you hold at our financial institution. If we become aware that the correspondent account you hold at our financial institution has processed any transactions involving FBME Bank Ltd. or any of its subsidiaries, we will be required to take appropriate steps to prevent such access, including terminating your account.

The special due diligence would also include implementing risk-based procedures designed to identify any use of correspondent accounts to process transactions involving FBME. A covered financial institution would be expected to apply an appropriate screening mechanism to identify a funds transfer order that on its face listed FBME as the financial institution of the originator or beneficiary, or otherwise referenced FBME in a manner detectable under the financial institution’s normal screening mechanisms. An appropriate screening mechanism could be the mechanism used by a covered financial institution to comply with various legal requirements, such as the commercially available software programs used to comply with the economic sanctions programs administered by OFAC.

A covered financial institution would also be required to implement risk-based procedures to identify indirect use of its correspondent accounts, including through methods used to hide the beneficial owner of a transaction. Specifically, FinCEN is concerned that FBME may attempt to disguise its transactions by relying on types of payments and accounts that would not explicitly identify FBME as an involved party. A financial institution may develop a suspicion of such misuse based on other information in its possession, patterns of transactions, or any other method available to it based on its existing systems. Under the proposed rule, a covered financial institution that suspects or has reason to suspect use of a correspondent account to process transactions involving FBME must take all appropriate steps to attempt to verify and prevent such use, …

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook with commentary and analysis by hundreds of AML experts from over 100 countries, is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation. As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities.

The 2014 Update includes the changes to Article 26 and its Commentary that were approved by the OECD Council on July 17, 2012. It also includes the final version of a number of changes that were previously released for comments through the following discussion drafts:

On June 18, 2014, IRS Commissioner John Koskinen disclosed that the 2009, 2011, and ongoing 2012 OVDIs have generated more than 45,000 disclosures and the collection of about $6.5 billion in taxes, interest and penalties. Thus, on its face, the OVDIs look to be batting an average of approximately 9,000 taxpayers a year with approximately $1.3 billion revenue.

However, at the beginning of the year it was reported that (OVDI) have led to 43,000 taxpayers paying back taxes, interest and penalties totaling $6 billion to date. The past 6 months only generating 2,000 additional disclosures and $500 million additional revenue may lead one to speculate that the OVDI, at least for high net wealth disclosures, is petering out. Regarding the 2012 IRS Streamlined OVD program, the Taxpayer Advocate found that as of September 2013, 2,990 taxpayers submitted returns reporting only an additional $3.8 million in taxes.

Substantial Money Laundering Penalties – But Not Tax Collection

The substantial majority of the $6.5 billion OVDI revenue is FBAR penalty, not tax collection and not tax penalty.

In the July 16, 2014 report, the Taxpayer Advocate found that the 2009 OVD program, the median offshore penalty paid by those with the smallest accounts ($87,145 or less) was nearly 6x the tax on their unreported income. Among unrepresented taxpayers with small accounts it was nearly 8x the unpaid tax. The penalty was also disproportionately greater than the amount paid by those with the largest accounts (more than $4.2 million) who paid a median of about 3x their unreported tax.

In her January 9, 2014 report, the Taxpayer Advocate previously found that for noncompliant taxpayers with small accounts, the FBAR and tax penalties reached nearly 600% of the actual tax due! The median offshore penalty was about 381% of the additional tax assessed for taxpayers with median-sized account balances. The GAO Report of 2013 found that for small accounts of less than $100,000 that over a six year period had only an average of $103 tax owing ($17 a year additional tax revenue), the IRS imposed a FBAR penalty of $13,320 (i.e. $2,220 a year FBAR penalty on average for $17 dollar tax understatement, in additional to the tax penalty and interest). The 25% percentile paid on average a $5,945 FBAR penalty for an average annual $277 tax understatement. The median paid a FBAR penalty $17,991 a year for $2,125 a year understatement.

When the IRS audited taxpayers who opted out (or were removed), on average, it assessed smaller, but still severe, penalties of nearly 70% of the unpaid tax and interest. Given the harsh treatment the IRS applied to benign actors, the Taxpayer Advocate reported that non-compliant taxpayers have made quiet disclosures by correcting old returns or by complying in future years without subjecting themselves to the lengthy and seemingly-unfair OVD process. Still others have not addressed FBAR compliance problems, and the IRS has not done enough to help them comply.

Have These Efforts Substantially Increased Taxpayer Compliance?

The Taxpayer Advocate, replying on State Department statistics, cited that 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements, yet the IRS received only 807,040 FBAR submissions as recently as 2012 (see Report Volume 1, Page 229). The Taxpayer Advocate noted that in Mexico alone, more than one million U.S. citizens reside, and many Mexican citizens reside in the U.S. (and thus are required to file a FBAR for any Mexican accounts of $10,000 or greater). Thus, currently, less than 10% of taxpayers with FBAR filing requirements are probably compliant.

The Taxpayer Advocate noted that “more than one million U.S. citizens reside in Mexico and many Mexican citizens reside in the U.S.” The Report pointed out that most persons that worked in Mexico had to pay into a government mandated retirement account (known as an AFORES), and that this retirement account may be reportable to the IRS as a foreign trust.

The GAO reviewed the 2009 OVDP and found that some immigrants stated in their 2009 OVDP applications that they were unaware of their FBAR filing requirements. The GAO found that the immigrants had opened banks accounts in their home country prior to immigrating. The GAO Report revealed:

IRS officials from the Offshore Compliance Initiative office stated that although there are several FBAR education programs, none are specifically targeted at new immigrants. These officials stated that one of the challenges that they face in their office, which is part of IRS’s Large Business and International Division, is that taxpayer education and outreach is the responsibility of IRS’s Wage and Investment Division and that issues concerning FBARs fall under IRS’s Small Business/Self-Employed Division.

The IRS reported to the Taxpayer Advocate that its FY2014 FBAR Communication Strategy includes efforts to reach U.S. citizens residing abroad via Internet, social media, and collaboration with the State Department.

The IRS also responded as follows (excerpted):

Congress enacted both the Title 31 and the Title 26 provisions regarding the reporting requirements of the FBAR … and Form 8938 (Statement of Specified Foreign Financial Assets). Reporting on the FBAR is required for law enforcement purposes under the Bank Secrecy Act, as well as for purposes of tax administration. As a consequence, different policy considerations apply to Form 8938 and FBAR reporting. These are reflected in the different categories of persons required to file Form 8938 and the FBAR, the different filing thresholds for Form 8938 and FBAR reporting, and the different assets (and accompanying information) required to be reported on each form. Although certain information may be reported on both Form 8938 and the FBAR, the information required by the forms is not identical in all cases, and reflects the different rules, key definitions (for example, “financial account”), and reporting requirements applicable to Form 8938 and FBAR reporting.

These differing policy considerations were recognized by Congress during the passage of the HIRE Act and the enactment of Section 6038D. Congress’s intention to retain FBAR reporting requirements, notwithstanding the enactment of section 6038D, was specifically noted in the Technical Explanation of the Revenue Provisions Contained in Senate Amendment 3310, the “Hiring Incentives To Restore Employment Act,” …

The Technical Explanation states that “[n]othing in this provision [section 511 of the HIRE Act enacting new section 6038D] is intended as a substitute for compliance with the FBAR reporting requirements, which are unchanged by this provision.” (Technical Explanation at p. 60.) …

How Much Tax Revenue Did Congress Expect

The Senate Permanent Subcommittee on Investigations issued a report March 4, 2009 entitled “Tax Haven Banks and U.S. Tax Compliance.” This report examined how tax haven banks facilitate tax evasion by U.S. clients that cost U.S. taxpayers an estimated “$100 billion each year”. This Report has been widely cited as authority for the claim that $100 billion is lost in taxes because of evasion of tax through tax havens.

However, the reports citation for this $100 billion figure is only its footnote 1 that cites five magazine articles unsubstantiated information, that also varied widely in terms of opinions regarding the amount of tax losses the U.S. incurs. The five articles mentioned as the foundation for the $100 billion amount do not refer to any empirical study, do not provide any empirical evidence, and do not provide any statistical methodology.

IRS Commissioner Charles Shulman, in testifying before the Permanent Subcommittee on Investigations on March 4, 2009, was questioned on the analysis of hidden money criminally held overseas:

Senator McCaskell: “Has there been any analysis done of how much of this money that is being hidden overseas is, in fact, a result of criminal activity?”

Mr. Shulman: “Not that I am aware of. I mean, estimating how much money that is overseas and not being paid to the government. As far as I am aware, there is no credible estimate because it is kind of a chicken and egg. It is over there and we have not found it, it is hard to estimate what is there. And all estimates that I have seen have not broken down criminal versus civil because, again, until we see the cases, it is hard to say.”

In the February 25, 2014 175-page bipartisan staff report the Senate Subcommittee increased the $100 billion to $150 billion. “Contributing to that annual tax gap are offshore tax schemes responsible for lost tax revenues totaling an estimated $150 billion each year.” To justify the reporting of this $150 billion a year of lost tax revenue due to “offshore tax schemes”, the Senate Report cites its previous investigatory reports supported by third party articles that refer to transfer pricing issues, not to studies about individual taxpayer offshore noncompliance.

Relative to the reported figure of $150 billion, the additional OVDI tax collection of approximately $500 million a year is just .003% (a third of one percent) of the goal. The FBAR money laundering penalties prop up the overall collection amount, but it’s a drop in the bucket of the Senate estimate.

How Much Did the Congressional Joint Committee on Tax Estimate FATCA Will Bring in Annually?

The Congressional Joint Committee on Tax estimated that FATCA will only generate $8.7 billion over ten years or average revenue $870 million per year. The $870 million annually appears not too far out of line with the tax collections generated by the OVDI the past six years, albeit the compliance costs to global industry to prepare for FATCA is currently estimated near this same amount based on government reports from the UK, Canada, Spain, among other trade partners of the US.

The Florida Bankers Association reported to Fitch that $60 billion and $100 billion in foreign deposits are held in Florida banks, close to 20% of the state’s total deposits. In 2012, Fitch estimated that a substantial portion of these deposits would NOT expatriate from Florida. But according to the Texas Bankers Association, FATCA has resulted in an outflow of $500 million of deposits from the Texas banking system already.

Based on a rate of the 15% long terms capital gain that applies to that money over the past six look-back years of Statute of Limitation, the currently cited $150B of lost annual tax revenue would require $1 trillion of annual taxable (hidden) income. To generate $1 trillion of capital gains income at a 5% rate of return requires $20 trillion of “noncompliant” offshore dollars. Is it likely that noncompliant money represents almost double the M2 money supply (Federal Reserve data of March 6, 2014 about $11T, see http://www.federalreserve.gov/releases/h6/current/) and about 20 times the actual amount of paper dollars that are in circulation?

Fifty contributing authors from the professional and financial industry provide 600 pages of expert analysis within the LexisNexis® Guide to FATCA Compliance (2nd Edition): many perspectives – one voice crafted by the primary author William Byrnes.

Tofasco Inc. of La Verne, California, according to its website, sources Chinese manufactured consumer goods for sale to US retailers. In an OFAC enforcement announcement of of July 17, 2014, US Treasury described Tofasco as a “small company lacking the sophistication of a larger company conducting international trade”. Yet, Tofasco settled potential civil liability for an alleged violation of the Weapons of Mass Destruction Proliferators Sanctions Regulations (the “WMDPSR”). How does a small California Chinese sourcing operation and importer allegedly violate the Weapons of Mass Destruction Proliferators Sanctions Regulations?

Tofasco initially presented trade documents to a bank in connection with a blocked letter of credit transaction representing payment for a shipment of recreational chairs with a substitute bill of lading omitting reference to the Islamic Republic of Iran Shipping Lines (“IRISL”), an entity whose property and interests in property are blocked pursuant to the WMDPSR. However, the bank refused to advise the letter of credit transaction due to IRISL’s involvement. Tofasco knew of IRISL’s involvement in the transactions. The Treasury stated that on or about April 16, 2009, Tofasco approached another bank to undertake the blocked property transaction. Tofasco undertook deliberate steps to evade or avoid U.S. sanctions requirements by obtaining and submitting altered bill of lading documents that concealed IRISL’s involvement.

Thus, the US Treasury found that Tofasco demonstrated reckless disregard for U.S. sanctions requirements in its presentation of trade documents to a second bank and by making payment for ocean freight for an underlying shipment of recreational chairs after the trade documents were rejected by a prior bank. Moreover, US Treasury found that Tofasco did not appear to have had an OFAC compliance program in place at the time of the apparent violation and Tofasco did not make a voluntary self-disclosure.

Treasury stated that Tofasco appeared to have violated §544.201(a) and §544.205 of the WMDPSR. §544.201(a) addresses prohibited transactions involving blocked property.

(a) … all property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of U.S. persons, including their overseas branches, of the following persons are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in:

(2) Any foreign person determined … to have engaged, or attempted to engage, in activities or transactions that have materially contributed to, or pose a risk of materially contributing to, the proliferation of weapons of mass destruction or their means of delivery (including missiles capable of delivering such weapons), including any efforts to manufacture, acquire, possess, develop, transport, transfer or use such items, by any person or foreign country of proliferation concern;

(3) Any person determined … to have provided, or attempted to provide, financial, material, technological or other support for, or goods or services in support of, any activity or transaction described in paragraph (a)(2) of this section, or any person whose property and interests in property are blocked pursuant to this section; and

(4) Any person determined… to be owned or controlled by, or acting or purporting to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked ….

Although US Treasury determined that Tofasco demonstrated reckless disregard, it did not find that the conduct constituted an “egregious case”. An egregious case, and the penalty enhancement, is described in my previous article about BNP Paribas’ transactions with Sudan and Iran. The maximum statutory penalty amount for this was $250,000, and
the base penalty amount was $25,000. Tofasco did not have a prior OFAC sanctions history. Tofasco settled the potential civil liability for $21,375.

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook with commentary and analysis by hundreds of AML experts from over 100 countries, is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation. As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities.

Read about Citi’s increase to 30,000 compliance positions by end of year, JP Morgan’s 30% compliance staffing increase and Bank of America’s doubling of audit staffing in last three years….

I’ve written several articles about compliance “whitewashing” on this blog (look under the tab compliance and money laundering). Compliance staffing at many banks has increased since the Patriot Act and renewed enforcement efforts against money laundering. More recently (in the past five years), financial institutions have been called out on dishonest activities with valuation of securities, on dishonest dealings with consumers (see my recent articles about the bank that simply threw away millions of customer mortgage workout files and sent mass mailing denials), on providing financial channels for a government involved in genocide…. I will not go though the entire list. These cases just stand out as particularly egregious. Compliance looked at, and was in some cases involved with, these transactions. So, throwing more staff into the cauldron does not quench the fire, nor, hopefully, will this mere fact satisfy the regulators.

By example, as a regulator, I would need to understand the educational foundation qualification that maps to the employment position. What degree in compliance does the new staff member have? Or is it that persons have been moved into compliance positions without the requisite underlying knowledge to execute the compliance role?

Protection against future long-term care (LTC) expenses is important for all clients. For the right client, combining LTC insurance with an annuity product can make all the difference between comfort and anxiety late in life.

That the need for LTC coverage is relatively universal, however, does not mean that the analysis of a particular combination annuity-LTC product is any less nuanced.

Just as every client is different, not all LTC riders are created equally—and your advice can prove crucial in finding the most suitable product for the individual client.

Read the thoughts of Professor William Byrnes and Robert Bloink on long term care annuity riders at ThinkAdvisor.

“Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience. The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community,” added Rick Kravitz.

Interested in exploring a Master or Doctoral degree in the areas of financial services or international taxation? Let’s talk. profbyrnes@gmail.com Watch my youtube video by clicking on the logo to the left.

Indexed variable annuities (IVAs) and structured annuities are two relatively new types of hybrid annuity products that are causing rampant confusion in today’s annuity marketplace. Used properly, these products can perform a significant role in a client’s portfolio, making it more important than ever to understand the nuances of these two annuity types.

The investment options offered by IVAs and structured annuities are extremely varied — in terms of opportunities for both market participation and downside protection — making the issue of client suitability particularly important. Today’s clients are looking for a customized product.

So it is time to begin asking: When it comes to IVAs and structured annuities, which product is the right fit? Read the answer of Professor William Byrnes and Robert Bloink at LifeHealthPro

Because of the constant changes to the tax law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. For over 110 years, National Underwriter has provided fast, clear, and authoritative answers to financial advisors pressing questions, and it does so in the convenient, timesaving, Q&A format.

“Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience. The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community,” added Rick Kravitz.

If you are interested in discussing the Master or Doctoral degree in the areas of financial services or international taxation, please contact me: profbyrnes@gmail.com to Google Hangout or Skype that I may take you on an “online tour”

Why are regulators so alarmed about Stored Value Cards? Citron Research published a report about the impact on a financial institution’s share value when the financial institution ignores its anti money laundering compliance (and receives a regulatory warning consent order, and worst, a cease & desist order).

“The Government crackdown on the stored value card business is real and not going anywhere. In a banking industry article published TODAY, we read “I would think this action sends a message to every other prepaid issuer that they better be buttoned up on AML processes and work very closely with their clients,” Colgan said.

On another topic of money laundering concerns, the LexisNexis chapter on Virtual Currency (e.g. Bitcoin) is being updated by its authors: Emmanuel Rayes (TJSL alumni) and Dr. David Utzke (MAFF, CFE, CFI is a Sr. Agent and lead agent for Virtual Currency and Digital Transactions for the IRS).

Virtual currencies have caught mainstream popularity and use the past 24 months. It was only a matter of time before an internet currency would catch mass adoption because of the convenience, speed, and ease of use that the internet provides. Governments all over the world have had a difficult time regulating virtual currencies due to their unconventional structure that is not typical of paper or fiat currencies and due to the rapid evolution of technology. Bitcoin is one such virtual currency that has caught the attention of government regulators all over the world.

Bitcoin is not a typical currency, but rather it is a crypto-currency. In addition, Bitcoin is based on a decentralized peer-to-peer network that’s not only responsible for the issuing of the currency but also for the transfers of the currency. The general currency model followed by almost every government in the world designates a central authority or bank for the issuing of the currency along with intermediary banking institutions responsible for the transfers and record keeping of user transactions. In the Bitcoin model, the middleman, or bank, is completely removed and the user controls the issuance of the currency in addition to facilitating, verifying and recording every transaction.

A greater concern is that criminals use the anonymity features of Bitcoin to launder money obtained from criminal activities or to fund criminal activities. The transactions made with Bitcoin are disclosed on a public ledger but the identity of the parties conducting the transactions are pseudo-anonymous which makes it laborious to identify the parties making the transfers. This creates increasing difficulty in charging and convicting criminals for crimes committed using Bitcoin. Read the full crypto-currency chapter, which forms part of the 5,000 page treatise and compendium of LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide

Individual Taxpayer Identification Numbers (ITINs) will expire if not used on a federal income tax return for five consecutive years, the Internal Revenue Service announced today. To give all interested parties time to adjust and allow the IRS to reprogram its systems, the IRS will not begin deactivating ITINs until 2016.

The new, more uniform policy applies to any ITIN, regardless of when it was issued. Only about a quarter of the 21 million ITINs issued since the program began in 1996 are being used on tax returns. The new policy will ensure that anyone who legitimately uses an ITIN for tax purposes can continue to do so, while at the same time resulting in the likely eventual expiration of millions of unused ITINs.

ITINs play a critical role in the tax administration system and assist with the collection of taxes from foreign nationals, resident and nonresident aliens and others who have filing or payment obligations under U.S. law. Designed specifically for tax administration purposes, ITINs are only issued to people who are not eligible to obtain a Social Security Number.

Under the new policy:

An ITIN will expire for any taxpayer who fails to file a federal income tax return for five consecutive tax years.

Any ITIN will remain in effect as long as a taxpayer continues to file U.S. tax returns. This includes ITINs issued after Jan. 1, 2013. These taxpayers will no longer face mandatory expiration of their ITINs and the need to reapply starting in 2018, as was the case under the old policy.

To ease the burden on taxpayers and give their representatives and other stakeholders time to adjust, the IRS will not begin deactivating unused ITINs until 2016. This grace period will allow anyone with a valid ITIN, regardless of when it was issued, to still file a valid return during the upcoming tax-filing season.

A taxpayer whose ITIN has been deactivated and needs to file a U.S. return can reapply using Form W-7. As with any ITIN application, original documents, such as passports, or copies of documents certified by the issuing agency must be submitted with the form.

What is an ITIN? An Individual Taxpayer Identification Number (ITIN) is a tax processing number issued by the Internal Revenue Service. It is a nine-digit number that always begins with the number 9 and has a range of 70-88 in the fourth and fifth digit. Effective April 12, 2011, the range was extended to include 900-70-0000 through 999-88-9999, 900-90-0000 through 999-92-9999 and 900-94-0000 through 999-99-9999.

The IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number (SSN) from the Social Security Administration (SSA). ITINs are issued regardless of immigration status because both resident and nonresident aliens may have a U.S. filing or reporting requirement under the Internal Revenue Code. Individuals must have a filing requirement and file a valid federal income tax return to receive an ITIN, unless they meet an exception.

What is an ITIN used for?ITINs are for federal tax reporting only, and are not intended to serve any other purpose. IRS issues ITINs to help individuals comply with the U.S. tax laws, and to provide a means to efficiently process and account for tax returns and payments for those not eligible for Social Security Numbers (SSNs). See my previous article on completing the W-8BEN.

An ITIN does not authorize work in the U.S. or provide eligibility for Social Security benefits or the Earned Income Tax Credit.

Who needs an ITIN?IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs. A non-resident alien individual not eligible for a SSN who is required to file a U.S. tax return only to claim a refund of tax under the provisions of a U.S. tax treaty needs an ITIN. IRS processes returns showing SSNs or ITINs in the blanks where tax forms request SSNs. IRS does not accept, and will not process, forms showing “SSA”, 205c”, “applied for”, “NRA”, & blanks, etc.

Other examples of individuals who need ITINs include: • A nonresident alien required to file a U.S. tax return • A U.S. resident alien (based on days present in the United States) filing a U.S. tax return • A dependent or spouse of a U.S. citizen/resident alien • A dependent or spouse of a nonresident alien visa holder

If a person does not have a SSN and is not eligible to obtain a SSN, but has a requirement to furnish a federal tax identification number or file a federal income tax return, then that person must apply for an ITIN. By law, an alien individual cannot have both an ITIN and a SSN.

How to apply for an ITIN?Use the latest revision of Form W-7, Application for IRS Individual Taxpayer Identification Number to apply. Attach a valid federal income tax return, unless qualifying by exception, and include your original proof of identity or copies certified by issuing agency and foreign status documents.

Do not mail the income tax return to the address listed in the Form 1040, 1040A or 1040EZ instructions. Instead, send the tax return with the Form W-7 and proof of identity and foreign status documents to:

Over 600 pages of in-depth analysis of the practical compliance aspects of financial service business providing for exchange of information of information about foreign residents with their national competent authority or with the IRS (FATCA), see Lexis Guide to FATCA Compliance, 2nd Edition just published!

Quoting from a story of the above link (which is a must read analysis of the GIIN list): “…Some back-of-the-envelope calculations (jump to table) suggest that, below a certain threshold of both total bank size and per-depositor funds, some banks simply don’t have the resources to comply with FATCA — and so, unsurprisingly, only a small proportion of institutions in low-income countries have signed FFI agreements. In Malawi, for example, it looks like only a quarter of the banks with SWIFT codes are in the FFI list.”

The second edition of the “LexisNexis® Guide to FATCA Compliance,” discussing the Foreign Account Tax Compliance Act of 2010 (FATCA), has been vastly improved based on over thirty in-house workshops and interviews with tier 1 banks, company and trust service providers, government revenue departments, and central banks. The enterprises are headquartered in the Caribbean, Latin America, Asia, Europe, and the United States, as are the revenue departments and the central bank staff interviewed.Chapter 1 of the book, “Background and Current Status of FATCA,” is available here for free download on SSRN, and also from LexisNexis. The full book is available for purchase from LexisNexis. See weblinks provided in attached PDF. Chapter 1 is primarily authored by Associate Dean William H. Byrnes, IV, of Thomas Jefferson School of Law’s Walter H. & Dorothy B. Diamond International Tax & Financial Services Program, with contributions by Professor Denis Kleinfeld and Dr. Alberto Gil Soriano. The lead author and editor of the overall book is Dean Byrnes (with Dr. Robert J. Munro).

The second edition of the book has been expanded from 25 to 34 chapters, with 150 new pages of regulatory and compliance analysis based upon industry feedback of internal challenges with systems implementation. The 25 chapters in the previous edition have been substantially updated, including many more practical examples, to assist a compliance officer in contextualizing the relevant regulations, provisions of inter-governmental agreements (IGAs), and national rules enacted pursuant to IGAs.

The nine new chapters in this second edition include, for example, an in-depth analysis of the categorization of trusts pursuant to the regulations and IGAs, operational specificity of the mechanisms of information capture, management, and exchange by firms and between countries, insights as to the application of FATCA, and the IGAs within new BRIC (Brazil, Russia, India, China) and European country chapters.

This second edition will provide the financial enterprise’s FATCA compliance officer with the tools needed for developing and maintaining a best practices compliance strategy, starting with determining what information is needed for planning the meetings with outside FATCA experts.

Over 600 pages of in-depth analysis of the practical compliance aspects of financial service business providing for exchange of information of information about foreign residents with their national competent authority or with the IRS (FATCA), see Lexis Guide to FATCA Compliance, 2nd Edition just published!

Like this:

Another excellent analysis from Haydon Perryman. From a “glass is half full” perspective, it’s relatively few errors for a large list. At least, that we can be aware given the limited amount of information currently available.

Of course, when all the data starts to flow, a different story may emerge. Treasury has a daunting challenge not to alienate the public and Congress with false positive audit matches of foreign account information compared to self-reported FBARs, 8938’s, and 1040s. At least, tax audit advisors will be kept very, very busy by their international clientele from 2016 through 2018 while the 2015-2017 initial deluge of information exchanged makes it way through the matching system and then audit process.

Perhaps the most revealing aspect of the list released by the IRS last night is those entities not on it. The IRS FAQs reveal that the IRS itself believes that the number of entities yet to register could be as high as 500,000. Many experts would put that number closer to 900,000.

Of the 77,353 entities who registered:

70,492 are covered by an IGA (either signed or agreed in substance)

586 are in the US or US Territories

6,275 are in Non IGA Countries

The 6,275 in Non IGA Countries represent only 8.1% of the total registered. One might draw the conclusion that as more countries enter into IGAs this will draw substantial numbers of entities in those jurisdictions to register on the portal. It does appear that a failure to sign an IGA would explain a lack of critical mass of registrants on the FATCA portal.

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Quick update Tuesday night, July 8th. Besides Brazil being decimated this afternoon 7 to 1 by Germany (leading to a very unhappy spouse and mother-in-law) …

Anguilla and Uzbekistan entered the Model 1 IGA list Monday (albeit dated June 30). Thus, 101 countries and jurisdictions have IGAs and 143 do not, based on the IRS’ revised country list published July 1. Approximately 95% of the 87,993 registered FFIs are from these IGA countries. Only 13 of the IGAs are Model 2, with 15,239 FFIs registered. The remainder 88 are Model 1 IGAs.

Curious if the IRS intends to treat the West Bank and Gaza as dependencies of the State of Palestine with each requiring a distinct IGA – being that all three are included on the IRS list (and yet not on the US State Department list as discussed in my early June articles). Or whether, a “Palestine” IGA will cover all three territories. If any readers know, please comment below and inform me.

I am also curious of the following: in Treasury’s opinion, IGAs do not require either Congressional approval or Senatorial consent. That we all know. Is it also Treasury’s opinion that it can enter into an IGA with Palestine and Cuba? What is State’s perspective of the IRS including the “State of” Palestine, as well as Gaza and the West Bank, on the FATCA country and jurisdiction list. Enough cynicism.

My previous articles on this subject of the IRS versus State department include my June 17 State Department listing and my June 8 discussion of the FFI GIIN List of June.

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For some clients, moving traditional retirement funds into a Roth account may seem like a no-brainer, but once the decision to convert is made, choosing whether to use a Roth IRA or Roth 401(k) can have potentially significant repercussions.

While the typical goal of a Roth conversion — reducing tax liability during retirement — can be achieved with either account, that is where the similarities end. In order to fully achieve the client’s goals, it is the dissimilarities between these two Roth varieties that can make all the difference.

Read Robert Bloink and WIlliam Byrnes’ analysis of the Roth conversion at LifeHealthPro

If you are interested in discussing the Master or Doctoral degree in the areas ofinternational taxation or anti money laundering compliance, please contact me profbyrnes@gmail.com to Google Hangout or Skype that I may take you on an “online tour”

In 2013, I participated in a constitutional law conference regarding international agreements, held in Siberia, Russia. My invited role was to discuss FATCA’s IGAs basis in US domestic law and international law policy, and comparatively discuss IGAs in the context of various EU countries. Some of those slides are available in my broader FATCA lecture at the University of Amsterdam International Tax Program Winter Session at http://www.slideshare.net/williambyrnes1/uv-a-winter-2014-fatca-and-eoi

In light of my academic interest in this subject matter, today I came across two pertinent blog posts that I share below, wherein Treasury justifies its policy based upon the potential for capital flight, followed by the Treasury opposite stance to the Court just months before in Florida Bankers Assn v Treasury. Below I post some of my lecture comments from 2010 regarding FATCA and capital flight.

Does Treasury have new information / data that it did not previously have, leading to its change of stance? Should we (voters with an interest in a stable financial system) be concerned? I am being facetious because Treasury (the IRS) does from time to time, in tax cases on an identical issue, advance opposing arguments (I have heard even in front of the same judge), depending on what outcome it wants from the taxpayer. After all, in law school, we teach our students to argue for both sides on every issue.

Treasury’s stated authority is: “Your letter also asks about statutory authority to enter into and implement the IGAs. The United States relies, among other things, on the following authorities to enter into and implement the IGAs: 22 USC Section 2656; Internal Revenue Code Sections 1471, 1474(f), 6011, and 6103(k)(4) and Subtitle F, Chapter 61, Subchapter A, Part III, Subpart B (Information Concerning Transactions with Other Persons).”

Professor Townsend (Houston) includes in the comments to the letter a rebuttal by Professor Allison Christians (McGill) “None of these sources of law contain any authorization to enter into or implement the IGAs. It is patently clear that no such authorization has been made by Congress, and that the IGAs are sole executive agreements entered into by the executive branch on its own under its “plenary executive authority”. As such the agreements are constitutionally suspect because they do not accord with the delineated treaty power set forth in Article II.” See Professor Christians full response at http://taxpol.blogspot.com.au/2014/07/irs-claims-statutory-authority-for.html

The above highlight is interesting enough mind you. But I must point out another aspect of the Treasury justification for IGAs. Treasury states that: “Suspending further negotiation of IGAs would negatively affect the United States’ ability to enforce the provisions of FATCA without the imposition of substantial withholding tax. … This could result in harm to the interests of the United States because it could prompt divestment from U.S. investments by affected financial institutions.” (emphasis added)

Treasury Argues Capital Flight Is Not a FATCA Concern

But Treasury argued quite the opposite in its recent, successful defense against the Florida and Texas Bankers Associations in Florida Bankers Assn v Treasury.

Quoting the Court:

“The IRS admits that it does not know exactly how much money non-resident aliens have deposited in U.S. banks. …

Instead of using exact data, the IRS estimated, based on a mountain of existing information from the Treasury Department, that non-resident alien deposits in U.S. banks amounted to no more than $400 billion. …

… The IRS was unconcerned because it had determined that very little of this mo.ney would be affected – namely, because these regulations would not deter any rational actor other than a tax fraud from using U.S. banks.

4. Capital Flight

At the heart of the Bankers Associations’ argument – albeit buried somewhat in their brief – is the contention that the regulations should not have been issued given the negative impact they may have on banks. Plaintiffs claim that the IRS “disregarded” a flood of comments arguing that the new regulations would cause non-residents to withdraw their deposits en masse and thereby trigger substantial and harmful capital flight. The IRS, however, did not ignore those comments; indeed, it dedicated a majority of the preamble to addressing concerns about capital flight.

… As a result of those protections, the Government concluded that the “regulations should not significantly impact the investment and savings decisions of the vast majority of non-residents.”

Plaintiffs raise one additional, related issue: They claim that the IRS ignored the massive capital flight that took place after the Canadian reporting requirements became effective in January 2000. The IRS, by contrast, contends that the alleged Canadian capital flight is a fiction: While the amount of Canadian interest-bearing deposits may have dipped after the reporting requirements were issued, they climbed back up shortly after that.”

Comments from my 2010 lecture on tax elasticity of deposits

Tax Elasticity Of Deposits

In the 2002 article International Tax Co-operation and Capital Mobility, prepared for an ECLAC report, from analysing data from the Bank for International Settlements (“BIS”) on international bank deposits, Valpy Fitzgerald found “that non-bank depositors are very sensitive to domestic wealth taxes and interest reporting, as well as to interest rates, which implies that tax evasion is a determinant of such deposits….”[1] Non-bank depositors are persons that instead invest in alternative international portfolios and financial instruments.

Estimating How Much Latin American Tax Evasion are US Banks Involved With?

Some Miami based commentators, like the renown author Professor Marshall Langer, estimated that at least $300B of capital outflow will occur from the USA pursuant to its exchange of tax information with Brazil and other Latin American countries, like Argentina and Venezuela. Based on their discussions with South Florida real estate firms, information exchange will lead to a withdrawal of Latin American interest in its real estate market. (Note that since 2010, we now know that US information collection will not look through company entities as is required by FATCA from FFIs, and because most real estate for estate tax purposes is held via corporate structures, it will not capture information on most real estate investment.)

Three historical benchmarks regarding the imposition of withholding tax on interest illustrate the immediate and substantial correlation that an increase in tax on interest has on capital flight. The benchmarks are (1) the 1964 US imposition of withholding tax on interest that immediately led to the creation of the London Euro-dollar market;[2] (2) the 1984 US exemption of withholding tax on portfolio interest that immediately led to the capital flight from Latin America of US$300 billion to US banks;[3] and (3) the 1989 German imposition of withholding tax that led to immediate capital flight to Luxembourg and other jurisdictions with banking secrecy[4]. The effect was so substantial that the tax was repealed only four months after imposition.

The Establishment of London as an International Financial Center

The 1999 IMF Report on Offshore Banking concluded that the US experienced immediate and significant capital outflows in 1964 and 1965 resulting from the imposition of a withholding tax on interest. Literature identifies the establishment of London as a global financial centre as a result of the capital flight from the US because of its imposition of Interest Equalisation Tax (IET) of 1964.[5] The take off of the embryonic London eurodollar market resulted from the imposition of the IET.[6] IET made it unattractive for foreign firms to issue bonds in the US. Syndicated bonds issued outside the US rose from US$135 million in 1963 to US$696 million in 1964.[7] In 1964-65, the imposition of withholding tax in Germany, France, and The Netherlands, created the euromark, eurofranc and euroguilder markets respectively.[8]

The Establishment of Miami as an International Financial Center

Conversely, when in 1984 the US enacted an exemption for portfolio interest from withholding tax, Latin America experienced a capital flight of $300 billion to the US.[9] A substantial portion of these funds were derived from Brazil. In fact, some pundits have suggested that Miami as a financial center resulted not from the billions generated from the laundering of drug proceeds which had a tendency to flow outward, but from the hundreds of billions generated from Latin inward capital, nearly all unreported to the governments of origination.

The Establishment of Luxembourg as an International Financial Center

In January of 1989, West Germany imposed a 10% withholding tax on savings and investments. In April it was repealed, effective July 1st, because the immediate cost to German Banks had already reached DM1.1 billion.[10] The capital flight was so substantial that it caused a decrease in the value of the Deutsche mark, thereby increasing inflation and forcing up interest rates. According to the Financial Times, uncertainty about application of the tax, coupled with the stock crash in 1987, had caused a number of foreign investment houses to slow down or postpone their investment plans in Germany. A substantial amount of capital went to Luxembourg, as well as Switzerland and Lichtenstein.

Switzerland’s Fisc May Come Out Ahead

Perhaps ironically given the nature of the UBS situation currently unfolding, a Trade Based Money Laundering study by three prominent economists and AML experts focused also on measuring tax evasion uncovered that overvalued Swiss imports and undervalued Swiss exports resulted in capital outflows from Switzerland to the United States in the amount of $31 billion within a five year time span of 1995-2000.[11] That is, pursuant to this transfer pricing study, the Swiss federal and cantonal revenue authorities are a substantial loser to capital flight to the USA. The comparable impact of the lost tax revenue to the much smaller nation of Switzerland upon this transfer pricing tax avoidance (and perhaps trade-based money laundering) may be significantly greater than that of the USA from its lost revenue on UBS account holders. Certainly, both competent authorities will have plenty of work on their hands addressing the vast amount of information that needs to be exchanged to stop the bleeding from both countries’ fiscs.

Over 600 pages of in-depth analysis of the practical compliance aspects of financial service business providing for exchange of information of information about foreign residents with their national competent authority or with the IRS (FATCA), see Lexis Guide to FATCA Compliance, 2nd Edition just published!

“Already a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes since October 2012, Gabon’s commitment today plays an important role for regional co-operation in tax matters and demonstrates effective action towards greater exchange of information”, said Pascal Saint-Amans. “We hope it will act as an encouragement to other African and developing countries to also join this important area of international co-operation in the fight for a fairer and more transparent international tax system”.

The Convention provides for all forms of mutual assistance: exchange on request, spontaneous exchange, tax examinations abroad, simultaneous tax examinations and assistance in tax collection , while protecting taxpayers’ rights. It also provides the option to undertake automatic exchange, requiring an agreement between the Parties interested in adopting this form of assistance.

47 countries and major financial centers on May 6, 2014 committed to automatic exchange of information between their jurisdictions, announced the OECD. All 34 OECD member countries, as well as Argentina, Brazil, China, Colombia, Costa Rica, India, Indonesia, Latvia, Lithuania, Malaysia, Saudi Arabia, Singapore and South Africa endorsed the Declaration on Automatic Exchange of Information in Tax Matters that was released at the May 6-7, 2014 Meeting of the OECD at a Ministerial Level.

The Declaration commits countries to implement a new single global standard on automatic exchange of information (“CRS” or “GATCA”). The OECD stated that it will deliver a detailed Commentary on the new standard, as well as technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September 2014.

The CRS calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions. Part I of the report gives an overview of the standard. Part II contains the text of the Model Competent Authority Agreement (CAA) and the Common Reporting and Due Diligence Standards (CRS) that together make up the standard.

What are the main differences between the CRS (“GATCA”) and FATCA?

The CRS is also informally called “GATCA”, referring to the “globalization” of FATCA.

The CRS consists of a fully reciprocal automatic exchange system from which US specificities have been removed. For instance, it is based on residence and unlike FATCA does not refer to citizenship. Terms, concepts and approaches have been standardized allowing countries to use the system without having to negotiate individual Annexes.

Unlike FATCA the CRS does not provide for thresholds for pre-existing individual accounts, but it includes a residence address test building on the EU savings directive. The CRS also provides for a simplified indicia search for such accounts. Finally, it has special rules dealing with certain investment entities where they are based in jurisdictions that do not participate in the automatic exchange under the standard.

Single Global Standard for Automatic Exchange (“GATCA”)

Under GATCA jurisdictions obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. Part I of this report gives an overview of the standard. Part II contains the text of the Model Competent Authority Agreement (CAA) and the Common Reporting and Due Diligence Standards (CRS) that together make up the standard.

The Report sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

To prevent taxpayers from circumventing the CRS it is specifically designed with a broad scope across three dimensions:

The financial information to be reported with respect to reportable accounts includes all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income) but also account balances and sales proceeds from financial assets.

The financial institutions that are required to report under the CRS do not only include banks and custodians but also other financial institutions such as brokers, certain collective investment vehicles and certain insurance companies.

Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations), and the standard includes a requirement to look through passive entities to report on the individuals that ultimately control these entities.

The CRS also describes the due diligence procedures that must be followed by financial institutions to identify reportable accounts.

Both the CRS model, which is currently being developed by the OECD with G20 countries, and the IGAs are based on the automatic exchange of information from the tax administration of one country to the tax administration of the residence country. As with other forms of exchange of information, a legal basis is needed to carry out automatic exchange. While bilateral treaties such as those based on Article 26 of the OECD Model Tax Convention would permit such exchanges, it may be more efficient to implement a single global standard through a multilateral instrument. SeeOECD Information Brief

Over 600 pages of in-depth analysis of the practical compliance aspects of financial service business providing for exchange of information of information about foreign residents with their national competent authority or with the IRS (FATCA), see Lexis Guide to FATCA Compliance, 2nd Edition just published!

34 chapters by 50 experts grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of Intergovernmental Agreements (IGAs) and local law compliance requirements (Chapters 17–34), including information exchange protocols and systems.

On July 3, Sun Trust resolved the criminal investigation into its “Home Affordable Modification Program” (HAMP) by agreeing to pay $320 million. Less than a month ago, SunTrust Mortgage Inc. (SunTrust) entered into a $968 millionconsent judgment to address mortgage origination, servicing, and foreclosure abuses, announced the Justice Department, Department of Housing and Urban Development (HUD), and the Consumer Financial Protection Bureau (CFPB), along with 49 state attorneys general and the District of Columbia’s attorney general.

“SunTrust’s conduct is a prime example of the widespread underwriting failures that helped bring about the financial crisis,” Attorney General Eric Holder said. “From mortgage origination to servicing to securitization, the Department of Justice is attacking every facet of conduct that led to the Great Recession. We will continue to hold accountable financial institutions that, in the pursuit of their own financial interests, misuse public funds and cause harm to hardworking Americans. We expect that there will be more cases like this to come.”

“Deceptive and illegal mortgage servicing practices have pushed families into foreclosure and devastated communities across the nation,” said CFPB Director Richard Cordray. “Today’s action will help homeowners and consumers harmed by SunTrust’s unlawful foreclosure practices. The Consumer Bureau will continue to investigate mortgage servicers that mistreat consumers, and we will not hesitate to take action against any company that violates our new servicing rules.”

What is HAMP?

The federal government launched HAMP as an opportunity for homeowners in dire straits to save their homes from foreclosure. However, SunTrust Mortgage, rather than assist homeowners in need, financially ruined many through an utter dereliction of its HAMP program. SunTrust Banks, Inc. received $4.85 billion in federal taxpayer funds through the U.S. Department of the Treasury Troubled Asset Relief Program (TARP) in 2008.

What SunTrust did?

Unwilling to put resources into HAMP despite holding billions in TARP funds, SunTrust simply placed piles of unopened homeowners’ HAMP applications and paperwork on an office floor until at one point, the floor buckled under the sheer weight of the document packages. Documents and paperwork were lost.

SunTrust issued “mass denials” to HAMP applicants and lied to the Treasury Department about the reasons for the denials. SunTrust’s statements to customers were false.

SunTrust improperly commenced foreclosure proceedings on homeowners in active HAMP trial periods, and some of those homeowners saw their homes listed by SunTrust for sale in local newspapers.

Rather than reviewing HAMP applications in 20 days and rendering modification decisions within an “as advertised” three- to four-month trial period, in the worst cases, some homeowners were confined to extended trial periods of two or more years.

SunTrust misreported current borrowers as delinquent to major credit bureaus.

SunTrust denied HAMP modifications to eligible homeowners and instead placed the homeowners in alternative, private modifications that were less favorable to borrowers.

Other borrowers who were transferred from SunTrust to another servicer while on active HAMP trial modifications were penalized.

SunTrust admitted that between January 2006 and March 2012, it originated and underwrote FHA-insured mortgages that did not meet FHA requirements, that it failed to carry out an effective quality control program to identify non-compliant loans, and that it failed to self-report to HUD even the defective loans it did identify.

SunTrust also admitted that numerous audits and other documents disseminated to its management between 2009 and 2012 described significant flaws and inadequacies in SunTrust’s origination, underwriting, and quality control processes, and notified SunTrust management that as many as 50% or more of SunTrust’s FHA-insured mortgages did not comply with FHA requirements.

SunTrust failed to promptly and accurately apply payments made by borrowers, and charged unauthorized fees for default-related services.

SunTrust failed to provide accurate information about loan modification and other loss-mitigation services, failed to properly process borrowers’ applications and calculate their eligibility for loan modifications, and provided false or misleading reasons for denying loan modifications.

Engaged in illegal foreclosure practices by providing false or misleading information to consumers about the status of foreclosure proceedings where the borrower was in good faith actively pursuing a loss mitigation alternative also offered by SunTrust.

SunTrust robo-signed foreclosure documents, including preparing and filing affidavits whose signers had not actually reviewed any information to verify the claims.

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook with commentary and analysis by hundreds of AML experts from over 100 countries, is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation. As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities.

On Monday July 1, the IRS released its new, short application form for small charities to apply for 501(c)(3) tax-exempt status. The new Form 1023-EZ is three pages long (instructions link is here), compared with the standard 26-page Form 1023.

As many as 70% of all charity applicants for tax exemption will qualify to use the new streamlined three page form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible. The IRS created a Q&A worksheet to help an organization’s representative determine if it can use the new 1042-EZ: link available here:

Question 1: Do you project that your annual gross receipts will exceed $50,000 in any of the next 3 years? (Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses. You should consider this year and the next two years.)

Question 2: Do you have total assets in excess of $250,000? (Total assets includes cash, accounts receivable, inventories, bonds and notes receivable, corporate stocks, loans receivable, other investments, depreciable and depletable assets, land, buildings, equipment, and any other assets.)

“Previously, all of these groups went through the same lengthy application process — regardless of size,” aid IRS Commissioner John Koskinen. “It didn’t matter if you were a small soccer or gardening club or a major research organization. This process created needlessly long delays for groups, which didn’t help the groups, the taxpaying public or the IRS.”

The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months. There are more than a million 501(c)(3) organizations recognized by the IRS.

The Form 1023-EZ must be filed using pay.gov, and a $400 user fee is due at the time the form is submitted. Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40, posted today on IRS.gov.

For a history of US tax treatment of charity, please read http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2304044 This article studies the American political debate on the charitable tax exemption from 1864 to 1969, in particular, the debate regarding philanthropic, private foundations.

“Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience.” said Rick Kravitz. “The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community.”

Authoritative and easy-to-use, 2014 Tax Facts on Insurance & Employee Benefitsshows you how the tax law and regulations are relevant to your insurance, employee benefits, and financial planning practices. Often complex tax law and regulations are explained in clear, understandable language. Pertinent planning points are provided throughout.